March 4, 2012
Hal Pomeranz, Deer Run Associates
Taking time off is important for maintaining your health and sanity. But as a consultant, it’s easy to feel that time not spent billing is wasted time. And forcing yourself to take time off when you feel like you should be billing– or when you feel like you should be looking for your next assignment– is almost as bad as not taking time off at all.
The trick that I use is to set a reasonable billing goal for the year, and when I reach that goal I simply stop billing. Instead I shift over to “fun” projects that I’ve had to put off because of my work and travel schedule. Or Laura and I travel to fun places together as a vacation, which is very different from the business travel I do normally. Or I just “veg out” and read a book or play computer games. The timing on this strategy usually works out well, since I commonly meet my billing goal late in the year when it’s typically hard to drum up new business: both because of the holiday schedule and the lack of budget at the end of the year for my potential clients.
Setting the Goal
The key is that when you reach your billing goal you have to be at a place where you don’t feel like you need any more money to get you through the remainder of the year. That means you have to have billed enough money so that you can pay yourself enough to cover your annual expenses for a year and the standard taxes that accrue on that income. You should also have billed enough to cover any overhead costs related to running your business for the year.
One mistake that I made early in my consulting career was forgetting to factor in large annual costs like my property taxes and annual homeowners insurance bill. One option would be to pay these costs on a monthly basis so that you can more easily factor them into your monthly expenses. However, there’s usually an extra fee for doing so. My solution is to plan as if the year were 13 months long instead of 12 and use the “extra” month of salary to cover the heavy annual expenses that appear at the end of the year.
So now you’ve hopefully got a figure that covers your gross salary needs and business expenses, but what about retirement planning? You’d better be saving some money unless you plan on working until the day you die (hint: this is not a good plan). Look into ways that you can invest some of your gross billing into a pre-tax retirement plan, and be sure to talk to your accountant about how much your company is allowed to contribute in “matching funds” in order to maximize the amount you are allowed to invest each year. Then build the maximum allowable amount into your billing goal.
Have you been forced to eat into your “six months of burn rate” savings plan? If so, then you’d better build your reserves back up to full before you quit billing for the year. Downtime comes when you least expect it. And you might need that float to carry you for a little bit when you start billing again in the new year.
Similarly, if you’ve been deferring any maintenance on big ticket items, like your automobile or property, make sure you plan on funding those repairs. While some work can be delayed for months if necessary during bad times, failing to address these issues will eventually cost you more money if put off for too long.
Now how about funding what you’re going to do during your downtime? Maybe you want to take a trip someplace nice. Factor in the extra cost for travel and/or any special expenses you’re planning to accrue during your time off. Make sure your billing goal covers those costs.
So your billing goal then is the sum of several factors:
- Gross salary to cover personal expenses (including large annual costs)
- Money to cover expenses associated with your business
- Retirement funding
- Any money necessary to rebuild your “rainy day” savings
- Deferred maintenance costs
- Special costs associated with vacation or other plans
If you get to a place where you can cover all of the above costs, then that’s a good place to stop billing. And you’ll be able to enjoy your downtime and not stress about needing to make more money.
The only other factor to consider is the long-term financial outlook. Right now, I’m personally very pessimistic about the global economy and am expecting another significant downturn in early 2013 (based on my assumption that nobody’s going to let the economy splatter before the US Presidential elections conclude in November of 2012). So I’m going to bill as much as I can in the next year in order to have a “war chest” against future bad times.
Advantages of Pre-Planning
There’s an additional benefit to setting a billing goal besides getting yourself to a place where you feel OK taking time off. The billing goal clearly focuses you on how many hours you need to bill and at what rate in order to get to your “happy place”. One of the side-effects of this process is often the realization that you need to find a way to increase your billing rates.
I strongly recommend you sit down and plan a billing goal at the beginning of each fiscal year. It focuses your efforts by giving you a target to shoot for. And it improves your mental health by allowing you to take time off without stress.
Wrapping Up This Series
With this article I’ve covered everything that I wanted to say based on my experience as an independent consultant. I hope you’ve found the advice useful in your own decision making and planning. Thanks for sticking with me!
If you have questions that you feel I haven’t fully addressed, please feel free to leave them in the comments and I’ll be happy to respond. Who knows? Perhaps your question will prompt me to add another full blog post in the series.