My wife thought I was nuts when I told her I wanted to quit my job and double-down on this freelancing business of mine. “You want to do what?!”
To be fair, I can’t say I really blamed her. I had a great job, great pay (six-figures and I was just out of university), and they insured me, my wife, and our newborn daughter. The bi-weekly paychecks they deposited into my account also made it easy to cover our mortgage, cars, and the other monthly obligations we were responsible for. And we didn’t exactly have a ton of money in the bank.
But I wanted to run my own business. I always have.
Since university, I was freelancing out of my dorm room — which paid quite a lot better when compared to most of my friends at school. And when I started working, I always did nights and weekends work.
If you’ve been considering making the leap from employment to working for yourself, then this article is for you. I’m not going to butter you up with motivational quotes about embracing risk or perseverance. Instead, I’m going to assume that you’re in a similar situation to the one I was in back in 2008: You’re ready to make the leap and you don’t exactly have a trust fund at your back.
I’ve thought long and hard about what mistakes I made and many of the freelancers in my audience have made (or are still making), and I’ve narrowed it down to five. Master the following, and you’ll be much more likely to keep your new freelancing business in business.
- Not coming to terms with your needs
We all have fixed expenses. Mortgage or rent, car loans, student loans, Netflix, utility bills, web hosting, along with a bunch of miscellaneous, fluctuating expenses.
Salaried employment gives you a steady, predictable source of income. You can budget and plan against the direct deposits that hit your checking account on the 15th and 30th of each month.
But when you’re working for yourself, your income will probably fluctuate. So in order for you to offset your expenses, you’re going to need to consistently make more than you’re spending—or at least be able to draw from savings until you’re able. It sounds simple, but the notion of a regular paycheck can be so ingrained that it’s hard to consider the alternative.
Before we talk about cash flow, you’re going to want to catalog how much you’re spending each month. Using a tool like Mint.com, go through your expenses for the last few months and split them into needs and wants.
- A need is anything that you absolutely require to stay afloat. These are things like mortgage payments, school tuition, groceries, utilities, estimated taxes (we’ll talk about this in a second), and so on.
- A want is everything else. Dinners out, designer clothing, the newest iPhone, and everything else that’s not essential to your survival.
Sum up how much you spend each month on “needs” (this is hopefully pretty constant), along with how much you’ve been spending on your “wants”. You must be able to cover your needs, but you can sacrifice your wants (only for now, hopefully).
- Reverse engineering your salary
“I make $100k a year, and given a 2,000-hour work year (50 weeks x 40 hours a week), that means I make $50 an hour. So I’ll charge about that.”
The issue is that a lot of the overhead that goes into freelancing isn’t taken into account with this formula.
As a freelancer, you’re going to need to find project leads, persuade and prove to them that you’re best for the job, keep your portfolio updated, pitch clients, send out invoices, meet with future and current clients, and more. This takes a lot of time, so if you expect a similar (or better) standard of living, you’re going to need to charge a lot more than your employed counterparts.
On top of that, employees have more hidden costs. Employers need to pay for recruitment (job ads, HR’s salary, finder’s fees, and recruiters fees). There’s also a cost in onboarding new employees into the company, which can sometimes take a few weeks or even months. Employers are also on the hook for health benefits, vacation time, retirement funds, sick days, and the hours a day their team dedicates to lounging around Facebook and Twitter.
When you’re figuring out what to charge, remember to take this into account. To a client, you’re like a faucet—you’re only billing them when you’re providing them legitimate value. You’re not an employee any longer; you’re a business who provides an in-demand product.
A simple rule of thumb is to double the effective hourly rate that you’re making now. Savvy clients know that you don’t have the overhead that a typical employee of theirs has, and you’re much easier to hire and fire. Ultimately, though, you’re going to want to learn how to quantify the value you bring to your clients and charge for that.
- Treating revenue like profit
As an employee, you’re used to having available to you whatever money is in your checking account. That’s your money, which you can spend on whatever you want to spend it on (though, preferably, you’re earmarking much of it for your “needs”).
When you become a freelancer, you’re going to need to make a distinction between revenue and profit. Revenue is the money that comes in as a result of the invoices you send; profit is what you keep from paid invoices.
Invoices will be late and you probably will have lean months. A mistake many new freelancers make is to be overly optimistic about getting paid or finding work. Issuing an invoice isn’t the same as getting paid for it, and a great meeting with a prospective client means nothing until a contract is signed. One of the best ways to handle the ebb and flow of self-employment is to do what my friend Jesse Mecham of YNAB advises: “Live off last month’s income.” Come up with at least a month’s worth of expenses and stash it away.
- Not knowing who your first clients are
If you’re accustomed to full-time employment, you’re used to predictability. Show up at the office each day and you’ll get paid.
“I just need to be at my desk each day, do good work for my clients, deliver on my promises, and I’ll be set. I’ll have plenty of client work and I’ll get paid.”
This is the mindset many new freelancers have. And while this should be how things work, it isn’t.
As a new business owner, you’re going to need to come to embrace sales and marketing. You’re going to need to have a method of predictably and regularly finding clients. In fact, you’ll need to shift your mindset:
You're not in the business of “design” or “building WordPress websites”—you're in the business of finding clients and solving their business problems.
To get started, here’s what you should be working on now:
- Make your employer your first client. You have a lot of experience and expertise in your company’s business, so you should consider whether your current employer would be open to having you convert from being an employee to a contractor. This might not exactly be the big leap forward you were hoping for, but it’s starter income. Chances are, your employer will want to ultimately replace you with somebody full-time, but in the short term you can bootstrap your freelancing business by turning to your current boss.
- Advertise within your immediate network. We all have a network, even if it’s just our friends and family. Let everyone know what you’re doing, what kind of work you’re able to do, and how potential clients can reach you.
- Build up relationships with agencies. I’m not a huge fan of subcontracting, but it can get you work quickly. A lot of agencies have projects in the queue but don’t have the bandwidth to complete them. Get to know whoever is in charge of hiring subcontractors, and give them an idea of when you’re planning on going out on your own (with a link to your portfolio, of course).
- Network, network, network. After work, try to attend as many local networking events as you can. Embed yourself in the local business community, talk with whoever will talk to you, and liberally give advice based on your area of expertise. Don’t attend with the expectation of finding immediate clients. Rather, you’re planting seeds that will hopefully yield great referral sources or even direct clients in the future. This is the strategy I use to find and cultivate business relationships at networking events.
Until you have a few signed, and ideally paid, clients under your belt, you shouldn’t quit your job.
- Not taking full advantage of your new flexibility
Lastly, many freelancers set themselves up for burnout by not treating their business like a business.
As a freelancer, you’re running your own company. And as the new CEO of your business, you need to realize that you provide a product (business value – e.g., a redesigned website that increases online sales) to your clients.
This means that you need to take charge of your business. Often, new freelancers end up replacing one boss with many bosses. The relationship between them and their clients looks and functions like the prior relationship between them and their boss.
Freelancing should be more rewarding than your current job. It should give you the flexibility, freedom, and financial independence that you expect it to give you. But for this to happen, you need to first create a strong foundation:
- Set the right expectations with your clients. It’s easy to fall into the trap of being treated like an employee. Many of your clients probably have employees, and might even treat you as an pseudo-employee-sans-benefits. As a professional, it’s up to you to control how you fulfill your product. What I mean by this is you need to take charge in determining how requirements will be planned and prioritized, when and how you’ll communicate updates, how your clients will test and ultimately approve your work, and more. Don’t make assumptions—treat the work you do as a product, and great products are consistent in their manufacturing and delivery.
- Learn to delegate. Ask yourself, “Am I the only person who can provide value here?” Many freelancers do all their own invoicing, bookkeeping, bill paying, and more. Not only does this waste time that you could be billing, you’re also causing yourself to do more context switching, which can be exhausting. The more experienced you are at delegation, the more capable you’ll be to possibly hire your own subcontractors or employees in the future.
- Charge more and work less. Did you know that if you doubled your prices and slashed your availability in half, you’d end up with the same exact standard of living? Amazing how math works, huh? Many freelancers end up burning out because they don’t make time for their own health and happiness. Being exhausted is not a badge of honor. Work to live, don’t live to work. Build your business to accommodate the lifestyle and income goals you have for yourself. A great way to charge more, and start here with this free course.
If you’re on the fence (or already in the process of becoming a full-time freelancer), hopefully this guide will help you avoid a lot of the mistakes I made when I transitioned from full-time employment. It ended up working out for me—but I’ll admit, I got lucky. I got the right clients at the right time, and they mostly paid me on-time.
But my case is an exception. Many freelancers give up because of a stint of late paying clients or an inability to make time for themselves and their families. You can succeed as a freelancer, and it’s now easier than ever, too. Good luck!
Now it’s your turn: What fears (or advice) do you have about starting freelancing?