Wednesday, May 20, 2009

Can Your Business Model Help You Reach Your Goals? Part 1: Service Professionals

Over the past 6 months, I’ve been shifting my priorities to working with small business owners.  One of the first things I’ll discuss with them is where they are now versus where they want to be. This helps us establish a path for them to take – what they need to do in order to grow their business to the desired level. Almost without exception, I’ve come to one startling conclusion:

Most small business owners do not have a business model that can help them reach their goals!

First, let me start off by sharing the most common goals most people cited:

·         More free time during the regular work week and weekends off

·         More time off from work entirely

·         Less work-related travel and more personal/family travel

·         More time and money to indulge in recreational activities

·         Specific income goals – usually in the $150,000 to $250,000 range

·         Debt-free

·         Own a new home, mortgage-free

Basically, the most important goals for the bulk of these people were either related to having more free time or having more money.  Sounds reasonable, doesn’t it? It is until I started to look at the plan – or lack of plan – these business owners had in order to reach their goals.

I’ll share with you some details on a client I am working with. Dan is a fairly solid programmer. He has a full-time job and does between 10 and 20 hours of work each week freelance. His rate is $45 per hour. He has around 3 months living expenses set aside and is ready to take the leap to going on his own. He and his wife have 2 young children. His wife is returning to teaching this fall and will be earning just under $30,000 a year. Dan wants to be able to take summers off starting in 2010 to spend with his family.  He would need to earn an estimated $110,000 in 2010 to reach his family’s financial goals. Since he’s been freelancing along with his full-time job for the past 3 years now, he wants to be able to have weekends off to spend time with the family. Before we spent some time together, Dan had planned on only increasing his hourly rate to $50.

Let’s say that Dan ended up increasing his rate instead to $75 per hour. That would mean he’d need to work about 1467 billable hours per year.  If Dan works  40 weeks per year that would mean almost 37 hours a week of billable time. This doesn’t take into account time between jobs (it’s rare a freelancer is booked solid), other work that isn’t billable, bookkeeping, invoicing, etc – all of which Dan planned to do on his own. Oh and where will all these clients come from? Who will handle the pre-sales, sales and quoting? When we had a look at this, Dan certainly felt discouraged. But then it got worse when I pointed out a few things to him:

What if he gets the flu and is unable to work for a couple of weeks? What if one or both of the children are off school due to illness? These are things that do happen.

His game plan didn’t take into account saving for his children’s college fund.  With his children being 9 and 11 years of age, it was something he needed to start planning for soon.

Although his wife’s financial contribution was nominal under their current game plan, one big thing she was bringing to the table was health care benefits for the family. What if her job didn’t go through or if she lost it due to lack of seniority?

Did Dan want to continue coding for the rest of his life – or even the foreseeable future? The problem with any kind of service-based business like this is that you are trading time for money. When you don’t work, you cease to continue earning money.

I think at this point Dan started to feel sick. It became blatantly clear that his business model sucked. His goals are more important to him than how he gets there.

Fortunately all was not lost. We were able to structure a new business model for him that should allow him to easily reach all of his goals in 2010 and over time allow him to continue to see increases in his income. Hopefully he’ll find himself with more free time too.

Dan’s original approach to starting a business is pretty common amongst most service providers and professionals. Trading time for money is a linear model. It’s simply not an entrepreneurial one. With rare exceptions, there are always ceilings to potential earnings.

In the next instalment I’ll be looking at other types of business models.

P.S. Name and personal information was modified to protect the client.

1 comment:

elves said...

I'm impressed, you write a lot of sense. You could write less: http://dangerousintersection.org/2006/04/12/more-time-shorter-letter/

You're right; by working with lots of companies you gain a lot of experience of and about modern companies. They used to say (in the days of books) that you became an expert if you read six books on a subject. What does that equate to in tweets?

It's fascinating that most techies just want to do their stuff. It's not really a business, as you point out. Is this the modern day equivalent of the craftsman? They could travel from place to place, or could stay in one place and have people come to them.
In medievil times what other businesses apart from merchants were there? We had production; food, clothing, shelter, making boats and carts.
Is scaling a business a bit like what the mortgage companies fanny mae and freddie mac did with their bad debts? They packaged them up as 'securities' and sold them to pension companies and banks. So they had more money to sell more mortgages.

I'm not expecting this to be posted. I've been reading your blog. I know you suggested someone post a comment and you would pick it up.

So, I'd like to write a piece on my vanity website about you and your ideas. Do you mind? It's at http://www.ongrowingold.org/

You'll be able to see it first, and you could comment. I expect you're too busy. I'm retired.

ttfn.