Start Your Own Firm - Pt 4 - Financial Matters

The new firm needs to consider administration and finance issues, too. There are quite a few of each flavor. I list the issues below with my take on what a new firm might consider or the decision that is needed. 

FINANCE ISSUES

Bookkeeping - keep it simple. See our 'Small Firm Accounting' series of articles.

Accounting - without other owners in the firm, but with a descent bookkeeping system, you may not need much in the way of accounting to start with. Real accounting is about tax issues, profits and reports about how you are doing financially. You may need this eventually, but not on day one. 
Debt - to the greatest extent possible avoid debt. Rapid growth is the main need for debt, and even then, you can get in a jam. If you already have a problem, adding debt is really dangerous. 

Cash-On-Hand - you can't have too much. Shoot for a steadily increasing balance on hand. When you can cover all your expenses for four months, great, that's a worthwhile target. Just keep accumulating more cash. The risks of investing the cash usually outweighs the returns as long as the amounts you are adding are larger than what the investment return would be.

Payroll - when you get that first regular employee, get a payroll service to do the payroll. We calculated that it took about 20 hours a month to run payroll and handle payroll taxes, etc. This was using Deltek Advantage software which made it a snap. Doing payroll in house will take about $3,000 a year; a service will cost 1/3 to 1/2 of that.

Invoicing - there are lots of ways to do this, even PayPal has an invoicing system that is free. The option of getting paid by credit card is attractive. Whatever you use, use it the first of the month. Don't delay. You already have 30 days of expenses tied up; your client may take another 30 days to pay you; get the invoice in the pipeline for payment right away. Also consider invoicing twice a month.
Overhead - you know it is easier to spend money than it is to make money. Act accordingly. Also investigate your options. Every expense that we assumed we needed in 2003 is now available for much less, often 50%+ less than we paid. Rent is the one exception.

Setting Hourly Rates - take 120% (adds 20% profit) of your monthly expenses except design consultants; divide that amount by the total number of actual billable hours for the month. That is your AVERAGE hourly rate. Adjust it up and down based on the expertise of the individual. Double check that the chosen rate times the number of billable hours per individual when added together still equals at least 120% of all your expenses. Avoid the impulse to get it exact. It is far more likely that you will have fewer billable hours than that you will have more. There is an upper limit to the number of hours you can be billable, but the lower limit is zero billable hours.

The administration issues will follow in the next article.

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LINKS TO OTHER ARTICLES IN THE SERIES
PART 1 - PROJECTS & BUSINESS DEVELOPMENT
PART 2 - MARKETING
PART 3 - SALES
PART 4 - FINANCIAL MATTERS
PART 5 - ADMINISTRATION