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Probability Prospects

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You’ve just been introduced to a person who was not only happy to meet you because you have the chops to take on a hot project that’s on his/her radar screen,  but also has the authority to green-light your hire.  Oh, happy day!  You’re thrilled to do the card exchange as your newest prospect asks you to make contact so that the two of you can talk specifics.  You can almost taste the billable hours,  but how excited should you be?  Statistical probability can help you put a dollar value on your happiness quotient.

I found this intriguing formula that uses sales outcomes historical data and probability that allows you to calculate the expected value of your next prospect.  As has been noted in numerous posts and no doubt reflected in your own experience,  there is a randomness to networking and Freelance consulting.  In our effort to bring much-desired predictability and financial security to our lives,  the Freelancer’s  (and all salesperson’s)  objective is to control variables,  positively impact outcomes and therefore win more projects and generate more revenue.

Let’s say you’re talking to a prospective client about a project that you estimate should be worth $10,000.00.  The operative word is should.  $10K is the potential value and not the real value until and unless one is awarded the project.  If you don’t win the project,  then it’s worth zero.

Your project’s worth is impacted by the probability of successful close.  The following formula allows you to calculate the potential value of the prospect and the project throughout the various stages of the sales process.  Both the steps in the sales process and the values assigned at each step in the process are based on historical data provided by a large corporate sales force.  To refine the accuracy,  identify the steps in your usual sales process and record your sales success rates at each stage of your sales process.

I.     Identify the steps in your sales process

  •      Invitation to meet and discuss the project
  •      Initial appointment / discussion of of needs and benefits
  •      Verbal proposal / assessment of needs and benefits
  •      Invitation to submit written proposal

II.    Determine the probability of a successful outcome at each step

  •       Invitation to discuss project                                                      2%  success probability
  •       Initial appointment / discussion of of needs                       8%  success probability
  •       Verbal proposal/ assessment of needs and benefits      25%  success probability
  •       Invitation to submit written proposal                                 65%  success probability

III.   Calculate the dollar value at each point of the sale for a proposed $10K  project

  •        Invitation to discuss project                                                     $   200.00
  •        Initial appointment / discussion of needs                           $   800.00
  •        Verbal proposal / assessment of needs and benefits      $2,500.00
  •        Invitation to submit written proposal                                  $6,500.00

The key to customizing the outcomes probability formula for your business is keeping detailed records of  sales presentations from which to compile your statistics.   In other words,  here is yet another reason to document your business transactions so that reliable data will be there to guide business planning.

Thanks for reading,

Kim

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Business Finance Resolutions for 2012

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Happy New Year!  Thank you for coming back in 2012.  The New Year is here and the time is ripe to take a fresh look at how you can bring more revenue and profit to your Freelance business.  The purpose of this blog is to inform and inspire readers to create the conditions that will generate a successful and rewarding Freelance consulting career.  Let’s get the ball rolling and look at how effective financial management promotes that goal.

Resolve to skillfully manage cash flow

Cash is king and cash flow is the life blood of every business.  Nothing flows unless the cash does.  Cash flow management means knowing how much money is expected to enter your coffers and when those checks are expected to arrive,  along with knowing how much money must be paid to creditors and when those checks must be sent. 

Even if you show a profit on your P & L,  it’s possible to have insufficient cash in hand to pay monthly bills and other accounts payable.  We all know that working as a Freelancer can be a cash flow nightmare,  so it’s vital to get arms around the accounts receivable,  or else sleepless nights will haunt.

Cash flow management actually begins in client meetings.  Once your project fee has been addressed and agreed upon,  diplomatically state that 15% – 20%  is paid at contract signing and that invoices are payable upon receipt.  Payment schedule for the balance will depend upon the length,  type and cost structure of the job. 

Whatever you do,  don’t allow more than 35%  of your fee to be payable at project conclusion  (unless it’s a small job).  Take steps to discourage the client from preserving his/her organization’s cash flow at your expense.  Write payment terms into the contract,  right along with the scope of your work,  deliverables and start date.

Resolve to get paid what you are worth

Establishing value and getting paid for same is the goal in every service business,  whether it’s teaching piano or being a nanny.  Your pricing strategy should reflect the value that your services bring to the client.  Needless to say,  pricing supports  cash flow and revenue.  To identify an appropriate fee range,  pricing experts recommend that you focus on four factors:

  • The perceived value of the services your provide
  • The demand for your services  (and your reputation as a purveyor)
  • What’s involved in the delivery of your service  (time = production cost = the Freelancer’s cost of goods sold)
  • Your mark-up / profit margin

Resolve to create and analyze the basic financial statements every quarter

Freelancers have a good idea as to how we’re faring financially,  because we either have the desired amount of money in the bank or we don’t.  We either have jobs in-house or we don’t.  We have either big jobs in or small jobs.  Like a balance sheet,  your bank statement provides the snapshot of your financial picture at a given moment.

There’s nothing like creating and then actually contemplating and analyzing one’s cash flow and income  (profit & loss)  statements to truly grasp your true financial picture and most importantly,  receive clues as to what would be advantageous for you to do about the business model,  sales and/or marketing segments of your consultancy.  Smart business decisions are invariably data-driven.

As you analyze your financials over the years,  you may identify regularly occurring busy periods and decide to hire temporary help or bring in a Freelance sub-contractor,  to give you another pair of hands at those times and allow yourself to make more money. 

Slow periods will likewise be identified.  You’ll be encouraged to find a way to either stimulate business during those times by incentivizing clients to hire you,  find temporary work,  find classes to teach (if that’s one of your competencies),  or engage in prospecting,  networking and professional development activities.

Next week,  I’ll return with more business-themed New Year’s Resolutions for 2012.

Thanks for reading,

Kim

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It’s Time to Stop Procrastinating

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It’s December 13.  Have you sent out your Christmas cards yet?  Well,  neither have I  (but I will).  I’m disciplined and organized and you know that to be true,  because I’ve faithfully published this blog every Tuesday morning since June 2009.  I enjoy writing this blog and I enjoy receiving cards from friends and colleagues every year,  but getting into the mood to write my cards takes some effort.  I will do it as always.  But first,  I’ll write this week’s post…

According to psychiatrist Ned Hallowell,   author of  “Driven to Distraction” (1995),  we mostly put things off because we are busy.  Most of us are working harder and longer these days.  Second,  we are prone to avoid what we consider to be drudgery.  But as we all eventually learn,  procrastination does not pay.  Avoiding the thing we hate does not make it go away.  It hangs like the sword of Damocles until the required work has been done.

The experts say that what we procrastinators need to do while we’re busy doing everything except what needs to be done is to understand why we’re avoiding the inevitable.  Research demonstrates that it basically breaks down into two categories:

1.   You’re faced with a task you despise and you’re unable to face it,  or

2.   You don’t know how to do what you need to do,  so you’re afraid to get started

We all put off doing what we dislike,  but procrastination cannot be allowed to rule one’s life.  To be a productive and responsible citizen,  to maintain positive work and family relationships,  we must train ourselves to put shoulder to the wheel and plow through onerous tasks when necessary.  Consider it character-building.

We can help ourselves by being honest about the kinds of tasks that we dislike and cause us to procrastinate and then figuring out which can be outsourced.  ( Would a virtual assistant write Christmas cards? )  You may want to hire someone to clean your apartment twice a month,  or send your laundry out,  or order your groceries online and arrange delivery.

Setting up a time table and schedule can help to get you started on what can’t be farmed out to someone else.  Use deadlines to motivate you to get cracking and get the job done.  Teresa Amabile,  co-author of  “The Progress Principle” (2011),  suggests breaking a project down into manageable segments and creating an achievable time table and deadlines for each.  These  “small wins”  make the project more manageable and less intimidating.  When faced with a task you have a history of avoiding,  put it in your calendar to tackle segments of it,  to ensure that you get the job done on schedule.  Post-it notes on your computer screen can work,  too.

It’s helpful to give yourself rewards for completing projects.  When segments of your project are completed,  maybe treat yourself to a nice hot chocolate and your favorite croissant at breakfast the next day.  When an especially important project is completed,  maybe a facial or a massage can be scheduled,  or perhaps even a weekend trip to a favorite place.

If your procrastination is caused by not knowing how to do something,  then get help.  Solicit advice from a trusted friend or colleague,  or do an internet search to get more information about how you can approach the project to learn what successful completion looks like and what you have to do to get there.  If you don’t have the required skill set,  recruit someone who does and make your project a team effort.

OK,  enough avoidance behaviour for me,  it’s time to face the music.  I bought a nice box of cards and holiday stamps back in November,  so I’m able to dive in and start writing.  My reward is a Christmas lunch party that’s in my calendar for December 14.  On my way to the party,  I’ll pass by the post office and mail the cards,  I promise.

Thanks for reading,

Kim

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How to Hire an Intern

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Perhaps by some miracle business has picked up and you need some help,  maybe for just a few hours each week.  You foresee that your need for help could last for some time and you’re ready to commit to a trial of at least six months.  You don’t have much money to spare,  but see that you’re probably losing money as you spend time performing certain functions that could  be handed over to less expensive labor,  which would allow you to focus on the vital aspects of client projects,  search for more billable hours and engage in other business-building activities.  Bringing on an intern may be the solution to your dilemma.

If you live in a locale with at least one college or university,  then you may have a source of interns to help you with business needs.  Interns can be a valuable resource,  especially for those who cannot afford to hire full-time employees.  With some planning,  a busy Freelancer can devise a win-win situation for both business and intern.

Plan to  offer a paid  internship.   Unpaid internships narrow your candidate pool more than you may realize.  In today’s economy,  many students must generate an income.  College has become wildly expensive and students and/or their parents often go into significant debt to finance their education.  Daddy may not be able to send spending money every month.

Paid internships provide a student with the tangible benefits of relevant work experience,  a reference for future full-time employment or graduate school application and a much-needed paycheck.  Moreover,  unpaid internships may present a legal snafu.  Strict federal and sometime state guidelines limit the hiring of unpaid interns to discourage student exploitation.  If you can find an intern whose financial aid package includes work/study,  the grant will absorb some of the hourly rate cost and save you money.

Start your search by thinking carefully about which tasks can be farmed out to an employee.  Be mindful that internships are not designed to provide businesses with low-level labor performed at low pay,  but rather to provide apprentice-level  learning opportunities.  Be realistic about what you can offer an intern.  Be prepared also to provide adequate instruction and supervision,  because you will be dealing with a young person who will need some guidance.

Next,  contact the school’s career services department or academic department that aligns with your professional needs  (e.g., communications or computer science or business).  Colleges are very eager to help match interns with prospective employers because that makes them look good.  Be ready with a basic job description and qualifications  (like web design or writing skills),  as well as what level of students you will work with  ( seniors, most likely). 

Remember also that students live on the academic calendar.  That means they disappear from about December 15 – January 15 for Christmas break,  they may disappear for a week during the April spring break and they may go home on May 15,  unless they can afford to stay in town for the summer or it’s convenient to commute in.

Plan to interview at least three or four candidates before you make your selection.  When you make an offer,  institute a 30 – 60 day trial period,  at which point you can decide whether the arrangement is working out.  Create the conditions for success by thinking through and communicating expectations clearly.  Discuss with your intern what s/he will be able to learn and be transparent about how performance will be measured.  Expect to spend time supervising your intern and maybe also explaining things twice. 

Empower your intern to show some autonomy and creativity once things get rolling.  Invite your intern to make some suggestions and offer opinions.  You never know,  you might learn something useful and you’ll show the intern that s/he is valuable. 

Always treat your intern with respect.  Assign meaningful work and provide the required training,  tools and follow-up to ensure that tasks are performed satisfactorily.  Offering an internship is your chance to mentor a young person and the rewards can be personal as well as professional for both parties. 

In the ideal circumstance,  your intern will give you the time to expand billable hours to such a level that you can offer to hire him/her full-time,  the ultimate win-win situation.  Good luck!

Thanks for reading,

Kim

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2011 Year-End Tax Planning

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It’s about that time,  folks.  2011 ends in 7 weeks and it’s time to plan how to handle your taxes.  We all have to pay something  (except if you’re a multimillionaire or billionaire, in which case you pay nearly nothing!),  so before December 31 it’s important to enact a strategy that will work well for you.

Tax planning boils down to either accelerating or deferring income or deductions.  In other words,  do you want to report and pay taxes on more money or less in 2011 and do you want more or fewer write-offs?  The road you follow will depend on many factors,  including what you did last year,  how much money you will make this year,  whether you expect to make rather more in 2012 because a big project will start then,  or you expect to make rather less next year because an important project will soon conclude and you have nothing big on the horizon.

Take a look at your 2010 tax forms and 3rd quarter 2011 P & L statement to see what your financials say about your options.  What do fixed and variable expenses look like?  That will impact your decisions about deductions.  What does net profit look like?  That will impact whether you choose to accelerate or defer income.

If you want to accelerate income,  start by collecting outstanding receivables.  Pick up the phone or send an email and ask clients to pay ASAP,  or at least before December 31.  Tell them it’s a tax-planning matter (it sounds so much more dignified than telling clients that you plain old need the money!).  If you’ve got a contract in the works,  ask for a bigger retainer.

If you opt to defer income,  perhaps because 2011 has been a good year and you’re not sure what 2012 will bring,  then wait until January to collect receivables and ask for a smaller retainer fee.  BTW,  it’s possible to defer up to 25% of your income through your Solo 401K and it’s tax-deductible.

If you need write-offs,  scout for year-end deals on office furniture,  computers,  iPads,  office supplies,  software and whatever else you need to do business,  including enrolling in a course or attending a conference.  Office furniture,  computers,  company vehicles and other big-ticket items can be written off in a lump sum,  or depreciated over a period of years  (which is in reality deferring the deduction since it’s being spread out).

If you elect for fewer write-offs,  hold off on shopping until the calendar turns.  Alternatively,  if you are presented with office or business equipment deals that you cannot refuse,  then choose the depreciation method and spread out your deductions.

Speaking of deductions,  remember your retirement plan.  Solo 401K and SEP-IRA are funded with pre-tax dollars and are tax-deductible up to $16, 500.00  If you’re 50+,  the catch-up contribution feature raises the maximum to $22,000.00.  Remember the tax-deductible income deferral feature if you’ve had a very good 2011,  but expect to have a less lucrative 2012.

Further,  you might want to make an appointment with your accountant or business attorney and confirm that you are enrolled in the best legal entity for you.  Your exit strategy can impact  the legal entity you use.   For example,  if you want to take on a partner and eventually sell out,  or pass the business to offspring,   niece or nephew,  a different legal entity may be preferable.

Finally,  the end of the year is the time to assess what’s happened this year for you,  professionally and personally. Review your successes and challenges.  What will you do differently in 2012 and what will you continue to do?  Did you meet your financial goal?  Did you manage to sign a dream client or get a wonderful proposal approved?  What should you reach for in 2012?

Thanks for reading,

Kim

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Take a Vacation

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It’s a counterintuitive approach,  but if you want to work smarter and be more productive,  then take a few days off and go away on vacation.  I realize that can be easier said than done for Freelancers and others in the billable hours universe.  Especially in a soft economy,  many of us are doing all we can to cover the monthly bills and the thought of slacking off on business pursuits is almost unthinkable.

Yet,  numerous researchers have demonstrated that vacations are comparable to a process improvement in your business,  resulting in increased productivity and efficiency.  Vacation does not mean that you no longer value the clients.  In order to avoid burnout and keep your batteries charged,  taking time off and traveling to a place that allows you to relax and unwind is a wise business strategy that pays personal and professional dividends. 

Every once in a while,  humans need to forget about work and relax and enjoy ourselves.  Recent research has shown that  a three to five day mini-vacation,  rather than the traditional two week time frame,  gives the most enjoyment.   As luck would have it,  that is exactly what fits well into a Freelancer’s often erratic project-based schedule.

A 2010 study by Jeroen Nawijn,  a lecturer at Breda University of applied Sciences in The Netherlands,  found that for most people,  the planning activities and anticipation provide more satisfaction than the actual vacation.  Nawijn suggests that if possible,  several three to five day trips should be scheduled throughout the year to reap the maximum benefits of the vacation experience,  starting with the fun we have doing the planning and enjoying the anticipation of the big adventure.  As further evidence,  psychologists Leigh Thompson of Northwestern University and Terence Mitchell of the University of Washington came to the same conclusion in their 1997 study of the psychological effects of vacations for workers.

Thompson and Mitchell suggest that vacationers participate in activities that completely absorb their attention.  Lolling on the beach and drinking pineapple rum punch is very nice,  but activities are more effective in helping us to disengage from work and business pressures and get the process of true relaxation underway.  That could be visiting museums,  touring the city,  hiking,  touring vineyards,  browsing at the bazaar,  or whatever else strikes your fancy.

It’s also recommended that you unplug your electronic toys and take a break from email and voicemail.  You might miss something,  but you’ll get over it.  In exchange,  you’ll receive the many benefits our brains and psyches derive from decreased stress.  A 2009 Boston Consulting Group study showed that taking time off results in improved communication skills,  decision-making ability and problem-solving ability,  plus decreased burnout and stress and higher productivity. 

I guess we can sum it up by saying that if we don’t take a few days off work every now and again,  we’ll just get tired and cranky and less effective.  We also won’t absorb information or learn as well,  which is why public schools give students 5 days off every three months or so.

I’m happy to tell all of you that I finally took a vacation myself,  after not taking any time off in about three years.  I spent 5 days on the coast of Maine.  I did not check email or voicemail.  I also missed my friend Jeremiah’s party (damn!),  but what can I say?  I had a great time soaking up sunshine,  drinking wine,  eating lobster,  visiting art galleries and taking in the sights.  I feel so much better!

Thanks for reading,

Kim

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Year End Tax Reducing Strategies

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President Obama’s tax plan will probably pass before Congress recesses for Christmas. The $250K + crowd can once again relax as they glide by in their Lincoln Navigators,  splashing mud on the hoi polloi.  Nevertheless,  those of us who are somewhat closer to the earth (flat on our backs financially speaking, perhaps?) still have a few defensive measures to take,  regardless of whether Bush’s tax cuts get extended by Obama and Congress.

Get the money now

In addition to giving a nice boost to your cash flow to help with Christmas shopping,  this is also a most clever way to approach clients and entice them to either pay on time,  finally make good on a late payment or even request payment a couple of weeks early.  You are not chasing money,  this is all about tax planning… Your accountant would like you to show X dollars in 2010,  for tax purposes.  The client will benefit by cleaning up accounts payable as the year ends.  That’s how you’ll phrase it when you speak to the finance director and ask that your outstanding invoices,  late or early,  get paid by 31 December.

Or, take the money later

Did you buck the trend and have an extraordinary year in 2010,  but expect less than thrilling billables in 2011?  In that case,  income deferral is your best strategy.  Mail invoices in January and sign contracts that require an up-front payment after the calendar turns.

Pump up the write-offs

If you have a few dollars available,  then stock up on office supplies before 31 December.  If you have more money,  then take advantage of the sales and purchase big-ticket items such as office furniture,  a more powerful computer,  a good camera,  or software that will help you manage business more effectively.  For example,  the right accounting software will make tax planning and business financial analysis easier.  Evaluate whether what you’re using now is sufficient for the needs of your business.

You get to choose how and when the expensive purchases will be written off,  either slowly over a period of years as depreciated assets or immediately,  by using the Section 179 deduction.  You can make that decision at the April 2011 filing.  Conversely,  if you suspect that you will come up short on deductions next year,  shop after the new year.

Review your retirement plan

If you’ve thought about establishing a Solo 401K,  do it by 31 December.  Add extra dollars to your pre-tax funded and tax-deductible SEP IRA or Solo 401K (if you’re age 50 +,  remember the catch-up contribution feature of the latter).  Exercise the profit sharing or salary deferral benefits of your Solo 401K if you’ve had a lucrative year and would like to keep some money away from the tax man for a few years.

Review your choice of business entity

Especially if you operate as a Sole Proprietor,  try to squeeze in an appointment with a business tax attorney or an accountant,  so that your financials can be reviewed and you can talk about where your business is now and what you’d like it to become in the future.  Do you envision selling your business,  or passing it to a family member? Perhaps you would be better served if you changed your business entity to either an LLC or S  Corporation.

2010 Tax Tactics

  • The health insurance deduction for Freelancers,  including Sole Proprietors,  LLC members (single or group),  general partners and S  Corporations (single or group and owning 2% or more of the stock),  will reduce taxes owed on income generated by self-employment and also the amount of self-employment tax owed.  Health insurance premiums are 100%  tax deductible if one is self-employed and does not participate in  a group health insurance plan.  Health plan premiums to insure your spouse and dependent children are also fully deductible.  However,  your business must show a Schedule C profit in order to claim this tax benefit.  Businesses that show a loss will not be eligible for this deduction.
  • Those launching a new business venture in 2010 will have a more generous start-up expense deduction of $10,000.00 ($5,000.00 is the usual limit).  File your registration paperwork toute de suite.
  • The Section 179 deduction has been increased to $500K for 2010 (and 2011).  Maybe you need commercial property for your business,  or a company vehicle or two?
  • If you’ve been thinking about hiring an employee and can find someone good within two weeks,  a one-time hiring credit can be taken in 2011 for an employee hired by 31 December, 2010.  The tax credit will equal 6.2%  of wages paid,  not to exceed $1000.00,  for each employee who is retained for one full year.  Your new employee(s) must have been either unemployed for the 60 days that preceded the hire or underemployed,  having worked a maximum of 40 hours in the 60 days preceding the hire.  Family members hired are ineligible for the new hire tax credit.

Thanks for reading,

Kim

 

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The Roth, The SEP and The Solo 

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As you begin to ponder your inevitable retirement from the Freelance life,  you’ll  need to examine options for saving.  Those who generate an income large enough to make planning and saving for the future an obvious course of action probably have an investment counselor to act as guide through the minefield.  

Yet at some point,  less wealthy Freelancers must also understand how to finance the next phase of their lives.  Choosing the best retirement plan option is confusing and subtle differences can magnify both at tax time and when it’s time to retire.  I hope that you find this post useful as you formulate the plan for your future.

The Simplified Employer Pension Plan

Somewhat similar to Solo 401K,  the SEP IRA retirement plan may be used by Sole Proprietors,  LLCs,   C  Corporations,  S  Corporations and Partnerships.  As an added bonus,  the SEP IRA may be used not only by those who have both W2 and self employment income,  but also by business owners who employ more than just the spouse.

Contributions to the SEP IRA are made pre-tax and contributions are tax deductible.  It is permissible to contribute up to 25 %  of W2 earnings plus up to 20%  of self employment income,  to the maximum annual contribution of $49,000.00 in 2010.  There is no  “catch up contribution”  provision with SEP IRA.

If you have a job,  including one where you are able to participate in a retirement plan,  along with a sideline business,  then SEP IRA is your option of choice.   Up to the maximum,  the amount you choose to contribute,  or even if you choose to contribute,  in a given year is up to you.  Contributions are held tax deferred and withdrawals made after age 59 1/2 are taxed as ordinary income.  Withdrawals made prior to age 59 1/2 are subject to the customary 10 %  premature withdrawal penalty and additionally,  will be taxed as ordinary income.

Small business owners with employees may institute a SEP IRA for themselves and their employees.  Business owners are able to make generous tax deductible contributions to the company SEP IRA on behalf of themselves,  the on-the-payroll-wage-earning spouse and other employees.

The business owner decides at what level to fund the plan,  up to 25%  of annual compensation.  The %  of funding for the business owner must equal what is offered to employees.  Each employee has an individual SEP IRA account and the business owner pays the entire contribution.  The pre-tax money paid into each SEP IRA account is tax deductible for the business and is a tax free benefit for the employee.

If you like,  it is possible to convert a SEP IRA to a Solo 401K,  something you may choose to do when you turn 50 and want to make those catch up contributions.  Other retirement accounts can be consolidated into the SEP IRA,  with the exception of a Roth  401K,  which is an after-tax fund.  It is not possible to borrow against the value of the SEP IRA.  April 15  is the deadline to establish and fund your SEP IRA account in order to receive a tax deduction for the previous year.

Roth 401K

 Unlike SEP and Solo 401K,   Roth 401K contributions are made with after-tax income.  Which option you choose will,  like most of life’s choices,  depend upon how much money you generate.  Depending upon your financial situation,  you may decide to split the difference and have both a  (pre-tax)  Solo 401K and an  (after tax)  Roth 401K. 

It is permissible to use the salary deferred portion of your Solo 401K to make a Roth 401K contribution.   Remember that the maximum annual contribution is $16,500.00  for those younger than 50 years and $22,000.00 for those 50 years and older.  Profit sharing Solo 401K contributions are not eligible to be made as a Roth 401K contribution,  since they are made pre-tax and are tax deductible and you cannot commingle the two.

While Roth 401K income deferred contributions are NOT tax deductible,  withdrawals you make after age 59 1/2 years are tax free IF five years have passed since your first contribution to the Roth (known as the 5 year rule).  Roth distributions must begin at least by age 70 1/2,  unless you roll over to the Roth IRA.

BTW,  if you transition into a job that offers a retirement plan,  you may be tempted to roll your SEP IRA or Solo 401K into the new retirement account.  Be advised that may or may not be a smart move.  Maintenance fees will be much lower for an account attached to a large company vs. that of an individual;  but there is much more investment flexibility available in your Solo 401K vs. what is available to a big corporation. 

Thanks for reading,

Kim

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The Self Employed 401K Plan

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Freelancers are the CEO of our solo business empire and we wear many hats.  In addition to promoting our business services,  networking and prospecting for new clients,  managing our brand,  remaining relevant in a fluctuating marketplace and BTW,  actually working on projects that give us the billable hours that allow us to eat and maintain the roof over our heads,  we must also define,  fund and manage our retirement strategy. 

A March 2010  SBA study found that we Freelancers are much less likely to make adequate financial preparation for retirement.  That’s probably because most of us are either on our spouse’s retirement plan,  or are not generating enough income to incorporate saving into our lives. 

If you’re unmarried and able to spare a few thousand dollars a year,  do set up a retirement account.  It is essential that we have cash available to us as we get older.  Inevitably,  the day comes when one is too old and frail to work.  Plus,  a retirement account  keeps money out of the hands of the tax man,  for a while anyway. 

The Self Employed 401K was created in 2001 and made available on January 1, 2002.  The Self Employed 401K offers benefits that compare well to the traditional 401K plan.  This retirement plan option may be used by Sole Proprietors,  LLCs,  S  Corporations,  C  Corporations and Partnerships.  Solo 401K may also be used by small business owners whose only employee is the spouse.  The spouse must be on the payroll and receive income from the business.

Solo 401K consists of two types of contributions,  salary deferral and profit sharing,   both of which are tax deductible.  Funds deposited into the account are held tax deferred.  As with the typical 401K plan,  you may begin to draw down after age 59 1/2.  Those withdrawals will then be taxed as ordinary income.  Withdrawals made prior to age 59 1/2 will incur the 10%  premature withdrawal penalty and will additionally be taxed as ordinary income.

The Self Employed 401K,  or Solo 401K,  allows Freelancers younger than age 50 to contribute a maximum $16, 500.00 tax deferred annually.  Freelancers aged 50+ are eligible to contribute up to $22,000.00 tax deferred income each year,  known as the  “catch up”  contribution.  Money deposited into a Solo 401K must be generated by self employment only and not salary.

Up to the maximum,  you may decide the amount of your annual contribution.  If you’re unable to make a contribution in a given year,  then don’t make one.  When billable hours are strong,  add extra money to the account whenever possible.  The profit sharing feature allows you to deposit up to 25%  of your annual income,  which is tax deductible and held tax deferred.  That equals maximum $49,000.00 a year for those under age 50 and $54,500.00 yearly for those age 50+.

A solo 401K retirement plan is easy to set up and there are no complicated administrative requirements for us to micromanage.  We are responsible for making the contributions and deciding where to invest.   The deadline for establishing your Solo 401K is December 31 of the year in which you would like to receive the tax deduction (fiscal year end for corporations).  When researching 401K plans,  look for the following:

  • Low expense ratios.  Check out http://morningstar.com for a rate comparison.
  • No or low set-up fees and annual costs
  • Investment flexibility.  You should be able to invest in stocks,  bonds,  index funds and mutual funds.

It is possible to borrow against the plan’s account balance,  maximum $50,000.00 or 50% of the account balance.  If the loan is paid back on time,  there will be no penalty charges or taxes assessed to the transaction.  It is also possible to transfer funds from another retirement account into your Solo 401K and consolidate your holdings.

We’ll delve further into this topic next week.  Thanks for reading.

Kim

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Attention Shoppers! It’s Time to Invest in the Business

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Our  “new normal”  economy has regrettably resulted in sluggish business for most Freelancers and we are forced to watch our pennies.  The financial squeeze may tempt many to cease spending on all expenditures deemed nonessential,  but it’s wise to be strategic about what gets relegated to that category.

In fact,  judicious expenditures for the right business upgrades will help us to fight back against the recession and demonstrate to clients that our business remains viable.  If your credit line can handle it,  this is an ideal time to invest in your business by purchasing almost any type of equipment or promotional service.   Fourth quarter purchases are sweetened by the knowledge that the tax deductions will flow back to you a little faster.

So let’s go shopping!  There’s plenty of inventory in the stores,  despite diminished wholesale purchases,  and prices have never been better.  Now is an excellent time to replace or upgrade  computers and other IT equipment,  office furniture or even a company vehicle.  Commercial real estate is likewise more plentiful and hence affordable,  so if trading up has been on your wish list,  investigate options now.   Plus,  if a build-out is necessary,  those in the trades are ready and willing to provide quality work at competitive prices. 

Advertising space is likewise more plentiful and hence more affordable.  Discounts are available and payment terms are gentle.  Revisit publications and online sites that were previously out of your reach and ask what can be done for you now.  Do not be afraid to negotiate.  The buyer’s market is in full effect.

Now,  take a look at your website.  Does it look a little dull?  Maybe the text could use some sharpening?  Or perhaps you’d finally like to have a logo?  What might help your website to communicate your brand and core services more effectively,  or provide a compelling  “call to action”  to potential clients?  Web developers,  graphic artists and copywriters continue to be busy,  but not so much that they won’t take on smaller  jobs and do good work at a reasonable price.

The  “new normal”  economy also makes this an excellent time to hire,  if you can make the case that an extra body or two will increase revenue.  There are so many highly qualified professionals searching desperately for cash-generating projects that you will be able to hire someone (maybe part time?) to write your monthly newsletter,  manage social media,  cold call prospects and set appointments for your follow-up,  manage the books and accounts payable and receivable or just about anything else you need taken off your plate.

Finally,  our professional skills are our most valuable asset and also deserve investment.  I’ve seen more generous than expected early-bird registration discounts offered for numerous seminars,  since organizers are anxious to fill rooms.  Take advantage of this trend and sign up for training that perhaps you previously could not afford.  You may also want to have a few sessions with a business coach,  who may now offer money-saving incentives to stimulate business,  and work on other ways you can find competitive advantages for your business venture.

Thanks for reading,

Kim