Many would-be entrepreneurs dream of the day when they get to become their own boss. However, this dream can get derailed for entrepreneurs who do not plan the transition to self-employment correctly.
Many tend to focus on the good things about being a freelancer — such as freedom and job satisfaction — without spending enough time planning for contingencies. But not planning for contingencies early on can set you up for failure.
1. Things never go as planned
Unfortunately, most people tend to plan for the best and assume that the best will happen. Maybe it’s because entrepreneurs are an optimistic bunch. In reality, no business plan, no matter how well-crafted, has survived first contact with the real world.
You have to plan for the contingency that things could go wrong — very wrong — if you want to make it. That last point is critical and is the key to surviving and thriving as a freelancer.
2. Do you have a business?
Leaving the security of a paycheck before you have a business plan or, better yet, a working business is risky. This reality creates a dilemma because the safest course of action is to start your business while you’re still employed. You must handle this scenario delicately and, above all, ethically.
You want to stay employed as long as possible to give your fledgling business a chance to develop and produce revenues. However, you will need to follow some rules of business etiquette.
- Avoid doing personal business in your employer’s office.
- Never use any of your employer’s resources for your own business.
- Give your employer 100% of your time and attention while at work without exception.
- And last, but not least, don’t compete against your employer while still working for them. It’s just bad form.
In summary, treat your employer as you would like them to treat you.
3. Do you have a budget?
You need to work on a budget before transitioning to self-employment. The easy way to develop a budget is to use personal finance software to track your expenses for three months.
Once you have three or four months’ worth of data, create a report that outlines your expenses. This report gives you a realistic view of your quarterly expenses. Spend a lot of time developing your budget and — most importantly — verifying its accuracy.
4. Do you have a reserve?
Your next step is to build a reserve sufficient to cover budgeted expenses for as long as it takes to build revenues from your business. The need for a reserve is why it’s so important to generate business revenues as early as possible.
Build a conservative reserve. Once you’ve established a target amount, consider adding a few months of living expenses as a safety cushion. The last thing you want is to run out of money just as your business is taking off.
5. Have you covered your medical insurance needs?
Many entrepreneurs forgo medical insurance when launching their businesses because they feel it’s too expensive. This unfortunate mistake could cost you business-wise and health-wise. Get medical insurance coverage, either through a spouse, through COBRA, or by purchasing insurance through one of the new marketplaces.
6. Making the Jump
Making the jump and leaving the safety net of employment is always a difficult, but exhilarating experience. The trick is to leave with class — as friends. Thank your company and boss for the opportunity they provided you. Offer to help tie all loose ends so that your departure minimizes hardship to your employer. Wish them well, and mean it. After all, because of them, you have now made the transition to self-employment.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Marco Terry is the managing director of Commercial Capital LLC, a firm that provides invoice factoring financing to freelancers and entrepreneurs.