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To a degree, those of us who are service providers or who produce intellectual property products have the same financial management issues as our retail product counterparts. We need to start with a business plan that includes an annual budget. We need to work from that budget as we go forward with implementing that plan. We need to regularly create balance sheets so that we can keep tabs on the fiscal health of our businesses.
In some ways, we have fewer concerns than product-oriented businesses. After all, we don’t have to worry about stocking product and managing inventory (including the possible expense of storage space for those products), or researching and bargaining with the suppliers or wholesalers who provide our raw materials or retail products.
Of course, those differences also make financial management much more difficult for us. On the one hand, we spend less on overhead because we don’t have to buy much in the way of physical materials in order to create our products. We are professionals: our commodity consists largely of what we know or what we know how to do. So, our only production expenses involve packaging our expertise in a way that is attractive or enticing to our market.
On the other hand, we are likely to need to spend more time and effort (and money) on public relations than our retail counterparts, because a large part of our marketability will come as a result of our ability to establish a reputation. Professional development courses and seminars, professional organizations and other similar business communities will be important for us, particularly online where we do not have the option of using personal appearance to help us convey our professionalism and the referral networks that are a common factor in generating clients offline are difficult to replicate online. What we save in production expenses in the annual budget may end up going out of our coffers in dues to professional organizations, tuition for ongoing education, and public relations instead.
Because image is so very important for professional service providers, we also may decide to forego the do-it-yourself method of website development, opting for a professionally crafted website instead — unless, of course, your profession is website development or design, in which case they are one and the same thing. By working at home, you may save a certain amount on your business wardrobe, but you may wind up spending it on your website and printed sales materials instead.
So, in the end, while it might seem as if it will cost you less to get your business up and running and keep it that way, the fact is that you are likely to spend as much (if not more) getting started if you want to present a truly professional appearance. And you will not have the luxury of simply selling your product and making money almost as soon as you can find your customers. Professional service providers have to sell themselves in addition to convincing people that they need your services; that’s often a much harder sell.
And you will often have your work cut out for you because the service that you offer may well be a high ticket item. Architects, accountants, market analysts and researchers, consultants of any type can be pricey. Intellectual property producers may offer their products for less money, but in the world of the Internet, it can be difficult to convince people to buy your product when so much is available for free. All this translates into some financial management issues that are more or less unique to service businesses, and it is a good idea to consider them carefully as you learn to manage your business.
Cash flow problems can be particularly acute for service businesses. Your first problem will be in securing customers, and your second problem will be in sticking to your guns and refusing to even begin work on any project for which you have not received some kind of deposit or initial payment. That is industry standard for just about every professional service that I know about. Whether it is called a retainer or a deposit or something else, you should receive at least one-third of your fee in advance of beginning your work.
When you first start out, you will probably experience a long dry spell and you should get your cash situation ready for that. Either begin with a little nest-egg set aside — and make sure you have enough there for your overhead for at least one year — or don’t quit your day job right away. If you have the right kind of relationship with your boss, and you are going to be continuing in the field in which you are working now, you might be able to get him or her to outsource some work to you. Having a former boss as a first client can help set you up very nicely.
If you are going into a field that is entirely different from anything you’ve done before, then you’ll have your work cut out for you. Again, don’t be in a hurry to quit your day job and use the time to develop your client base through working on your business part time until you think you can make a go of it full time — like, when you have enough business that you don’t have time to work on all those projects on a part-time basis.
Don’t be careless about your credit policies. Professional service providers, more than anyone else, need to establish their credit policies and collections practices right from the beginning. Don’t be squeamish, and make sure to secure the services of a top-notch collection agency. It will be worth it. If the money is available, take advantage of personal credit reports and Dun & Bradstreet reports.
Finally, pay close attention to the rhythms of your business. Know when the dry seasons hit and get ready for them. In many professional services, it is possible to make a great deal of money on just a few projects but it is equally possible to then go for another six months before nailing another client. Be ready for those slow times because, especially in the early years of your business’s life, they will come.
Payment Methods and Options
Providing realistic payment options for your potential customers will be important, both in terms of attracting clients and in terms of getting paid regularly enough so that your cash flow situation does not suffer. Often, professional service providers have large scale, by-the-project fees of a few thousand dollars; you are likely to have fewer transactions but individual transactions will be larger.
This means that you may have to shop around a bit for a merchant account provider. Some merchant account providers have per transaction maximums, which they put in place as risk management features for “card not present” transactions. This will hurt you if one third of your typical project is $1200, and your per transaction maximum is only $500. You will need to either find another merchant account provider or insist on snail mailed checks or money orders.
By the way, snail mail communications for a first time customer may be a good idea anyway, in terms of your own risk management. Paper contracts are still preferable to electronically signed contracts until the Electronic Signatures in Global and National Commerce Act is tested in court a few times, and having an actual signature when processing a credit card transaction is the next best thing to being able to physically swipe the plastic for your own anti-fraud risk management. Sure, it takes longer, but real-time transaction processing is not as important when you are going to be working on long-term projects as it might be for online product sales.
Pricing and Marketing Your Service
At first glance, it seems that this is an issue that gives many service providers the willies. What should I charge for my services? Unlike retail products, there is little in the way of guidance here. Retailers can calculate how much it costs them to create the product, how much it costs them to operate their business during the time it takes to sell the product (giving them a per item operating expense cost), how much of a profit margin they want and what a reasonable mark-up would be, and then they can price their product accordingly.
Service business and intellectual property producers may be in something of a quandry. Often, product development consists of years spent in school followed by years of training or further honing your skills. Realistically, if you were to charge people for all those years of your time, or all the money spent on your college and/or graduate school tuition, nobody would be able to afford you. On the other hand, it may be that you have done your research and discovered what is industry standard for other consultants in your field, but you are uncomfortable charging that much. What if nobody can afford that? What if nobody is willing to pay me that much money?
This is often a very difficult problem, because it has less to do with business management than it has to do with your own self image. You have no problem imagining other consultants in your field getting paid that much money; it’s just hard to imagine anybody paying that much to you.
Often this problem is compounded because many of us have trouble separating our support networking circles from our business networking circles. Many of us seek the company of other home-based working women and, in particular, WAHMs have a strong, viable support community online. But, as much as we might like to remain within that supportive, nurturing community in order to conduct our business, the fact is that many of the women who provide such wonderful support would not need our professional services and almost certainly cannot afford them.
That means that, in addition to seeking out support and community for your social needs, you will have to work on developing a separate network in which you travel to make business contacts among the folks who are your actual market. In many cases, the professional service providers among us may have trouble making a success of their businesses because they are trying to market to the wrong set of people. There is no need to deny yourself the support and encouragement that you have come to value from those women-in-business online communities, but there is also no reason to confine yourself to them when you are looking for clients. As a matter of fact, it is likely that there is no market in that community for your service; that isn’t an attempt on your part to think yourself “above” anybody, it’s just plain business sense.
One sure-fire sign that you are having trouble with this issue is when someone asks how much you charge for your expertise and your first thought is to worry that they may not be able to afford it. If that is the case, then one of two things is going on here. Either you have not done your homework so that you know what industry standard is, or you are looking in the wrong places for your clients. Assuming that you did your research before you started this business, the odds are that you are not overcharging for your service. In fact, there’s a better probability that you are undercharging. And, when you start thinking like this, you are assuming responsibilities that are not yours.
It may sound terribly hard-hearted, but it is not your problem to solve if one potential customer can’t afford you. How much sleep do you think the grocery store owner loses over the people who may not be able to pay what he charges for a gallon of milk? Probably very little. If they can’t afford it, they don’t buy it. If they can afford it, and they want it, they do buy it. That’s just all.
And that’s the way it has to be with your business. You can help yourself out with this by standardizing your prices as much as possible, either by deciding that your base rate is a certain amount of money per hour, or your basic price for this kind of project is that much money and anybody who wants extras will pay more. People who can’t afford it won’t buy it; people who want it, and can afford it, might. That’s what it costs, and that’s just all.
The solution here is to adjust your thinking, not your pricing structure. It may be that your perspective is skewed becauase you socialize with people who don’t have that much money to spend on a service like yours, which they may consider a luxury. If that is the case, don’t adjust your prices so that the folks you network with can afford it. Instead, try to find the people who can afford it and market to them. Don’t sell yourself short. Examine your promotional strategy, and make sure that the people you seek as potential customers are, in fact, your market.