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Why consider…the consulting & freelancing sector?



Consultants and freelancers are experts in their field, sub-contracting their talent on a self-employed, as-needed basis to other companies. MoneySense for Business tells you what you need to think about when starting your own business in the consulting and freelancing sector.

 

Introduction

Becoming a consultant or freelancer may suit you if you want to have more control over the work you do; you want to work more flexibly; you prefer to work outside of the usual office environment; and you want the variety of working on a range of projects and for a number of clients.

Consultants and freelancers are experts in their field, sub-contracting their talent on a self-employed, as-needed basis to other companies. There are many terms used for those who employ their skills in this way – knowledge worker, interim, independent worker and consultant, being just a few. What they have in common is that they offer flexible solutions for businesses that may neither need nor want to recruit permanent staff to complete a project. While management consultancy, IT consultancy and freelance creatives, such as journalists and graphic designers, may be the best-known professions within the sector, it is in fact incredibly diverse. The public sector, education, and energy & utilities are expected to see increasing recruitment activity, according to a 2009 survey by leading consultancy recruitment advisers Top Consultant. Business process improvement, project management, and IT & software development were expected to be the most active professions within the sector.

Becoming a consultant or freelancer may suit you if you want to have more control over the work you do; you want to work more flexibly; you prefer to work outside of the usual office environment; and you want the variety of working on a range of projects and for a number of clients. The disadvantages of working in this way include less job security; uncertainty about where the next job is coming from; lack of benefits such as sick and holiday pay; potential isolation; and the headache of running your own business, with all the admin this involves and the ultimate accountability it entails.

There are a number of business models to choose from in the Consulting & Freelancing (C&F) sector, from operating as a sole trader or setting up a limited company, to working via a recruiter or umbrella company. You will also need to consider whether you prefer to work from home, from rented premises, or within an employer’s own office. This flexibility – and the generally higher net earnings available – make consulting and freelancing an increasingly attractive option.

In brief


The pros and cons

As with any start-up, the positives and negatives of going it alone will depend on personal as well as business matters. Here are a few points to consider if you’re thinking of entering the C&F sector:

Portfolio working You may supplement your wages from an existing employer by taking on additional consulting or freelancing work

Pros

  • Profit from existing skills This may be particularly relevant if you’re an artist, designer/maker, or have another creative talent, but do not earn much money from the sale of your work
  • Portfolio working You may supplement your wages from an existing employer by taking on additional consulting or freelancing work
  • Independence You’ll be your own boss and choose the projects and employers you prefer
  • Higher wages The tax benefits of working as a consultant or freelance generally mean your net earnings are higher.

Cons

  • Less job security You’ll be employed on a project-by-project basis
  • More competition The growing popularity of the sector, a recent influx of ex-employees into the C&F market, plus a reluctance by some employees to outsource work, mean more people competing for fewer projects
  • No staff benefits Say goodbye to sick or holiday pay
  • Responsibility It’ll be up to you to generate and complete work
  • Accountability Depending on your business model, your personal assets may be at risk if legal action is taken against you
  • Business skills required You’ll need to run and market your business, or employ people who can provide the skills you lack

The statistics

The PCG suggests that the freelance day rate for a consultant, compared with a permanent employee earning around £61,000 per annum, would be equivalent to £345 per day.

Consulting & Freelancing is a growing and rapidly evolving sector, but it has seen mixed fortunes in the past two years. Latest data from the Professional Contractors Group (PCG) shows an estimated 1.4 million freelancers contributing £82 billion to the UK economy across all sectors, including manufacturing, services, finance, healthcare and education. The PCG reports that the start of 2010 saw strong growth in the number of freelance businesses, as people who have been made redundant use this model to re-enter the workplace. The PCG also suggests that employers are increasing the number of contract positions they offer, in response to a reduced permanent workforce.

However, Freelance UK cites creative agencies laying off freelance staff, local authorities cutting back on consultants and freelancers, and the reluctance of businesses to invest in freelancers, preferring to complete projects in-house. It remains the case that those consultants and freelancers who are good at their job, who effectively market their services and adapt their business plan to the available opportunities, should be able to run a successful business.

The diversity of the sector and regional differences mean that earnings vary greatly. Most consultants or freelancers will charge a day rate for their services, although work on a long-term project may be subject to a single, one-off fee. A freelance graphic designer may charge around £175 per day for their services. An HR consultant may expect around £200 per day outside London and around £650 per day in the capital. Fees for a management consultant may begin at around £300 per day, with annual earnings of around £50,000. The PCG suggests that the freelance day rate for a consultant, compared with a permanent employee earning around £61,000 per annum, would be equivalent to £345 per day.

Business models

By choosing the right business model, you can maximise your earnings, protect yourself from liability and manage your finances effectively. Here are the options for the C&F sector.

Sole trader

This is the most straightforward option when it comes to running your business and managing its finances, and as such it’s a choice favoured by many consultants and freelancers. You’ll be self-employed and take responsibility for paying your own income tax and National Insurance contributions. Business income will be counted alongside any personal income. You could also decide to establish a partnership, working with another individual.

The advantage here, of course, is that business expenses and losses can be offset against tax. However, you’re liable for any debts you incur in the running of your business, including lawsuits, so personal assets such as your home may be at risk.

Umbrella company

The charge for this service is around £100 per month.

You’ll be employed by an umbrella company that pays you on a PAYE basis, although you’ll be able to claim travel and subsistence costs that you would be unable to invoice for as a permanent employee. In return, the umbrella company will invoice your client, pay you for the work you do and chase invoices. The charge for this service is around £100 per month.

The umbrella company will also handle all your financial administration and take on any compliance responsibilities, so you won’t have to manage the legal requirements and risks associated with running a limited company. However, you’ll still have to find your own work and as this won’t be your own company, it’ll be harder for you to build your own brand. This route is less tax-efficient than operating either as a sole trader or limited company.

Recruitment agency

You won’t have responsibility for compliance issues.

A recruitment agency operates in a similar way to an umbrella company, in that you submit a timesheet for the work completed, the company then works out your tax and National Insurance contributions and pays you a net salary. You register with the agency for free and the agency will match your skills to employers. And it’s in the recruiter’s interest to find you work, as their fee depends on matching clients to talent; they will negotiate fees with your client and handle all financial administration. You won’t have responsibility for compliance issues.

As with an umbrella company, this won’t be your own company, making it harder for you to build your own brand. Again, it’s also less tax-efficient than operating either as a sole trader or limited company.

You will be the company director and have complete control over the business, operating its bank account and taking responsibility for its financial affairs.

Limited company

This is the most tax-efficient way of working, as you keep more of your earnings, making it the most popular business model for the majority of workers in the C&F sector. The easiest way to set up a limited company is to buy one off the shelf via an accountant or company formation bureau – this will cost between £100 and £150, although some accountants will set one up for you for free. You will be the company director and have complete control over the business, operating its bank account and taking responsibility for its financial affairs. However, the company is legally distinct from you; it can own property and equipment, and has its own rights and responsibilities. You could also decide to set up a Limited Liability Partnership, which allows you to work with another individual while limiting your personal liability.

Becoming a limited company protects your personal assets, as the company is liable for any debts it incurs. It can give you credibility with clients, suppliers and funding organisations. You will be paid gross and will control what salary and dividends you pay yourself. However, you’ll also have more financial deadlines and responsibilities, although a specialist accountant can help minimise the burden.



Money matters

Set-up costs

It can cost relatively little to start a business in the C&F sector. In all likelihood, you’ll already have the skills you need to attract clients, so training costs won’t be a factor. The services you offer will generally be knowledge-based, again meaning you won’t need expensive equipment or large premises to operate. Basic costs to factor into your business plan may include IT and communications equipment, premises and perhaps transport, if you plan either to travel to clients’ offices or to offer a mobile service, such as IT support.

Contingency fund

The PCG suggests every consultant or freelancer should have a cash emergency fund equivalent to six months’ earnings to cover living expenses if work is thin on the ground, or you want to take a short-term break due to illness or a holiday.

Professional registration

Signing up with a networking site or support organisation such as the Professional Contractors Group will cost from around £120 per year, but will include insurance against tax investigations and access to discounted services, such as accounting.

Costing, pricing and invoicing

Extra work or amendments must also be factored into your fee, or an additional fee for this work agreed.

As a consultant or freelancer you will be asked either to pitch for a project, including setting a fee for your services, or you may be offered a fixed fee, which you may then negotiate with your potential employer. In either case, you’ll need a clear quote (provided by you) or brief (provided by the client) that sets out deadlines, costs and what is expected. As well as time spent completing the actual project work, you must also consider time spent in meetings, researching, planning, and dealing with subcontractors. Extra work or amendments must also be factored into your fee, or an additional fee for this work agreed.

According to Business Link, you can be expected to bill for 60% of your working week, as the remaining time will be spent on administration and other aspects of your business. Profit margins across the C&F sector range between 15% and 40%, with 20% considered a fair rate.

Profit margins across the C&F sector range between 15% and 40%, with 20% considered a fair rate.

As an alternative to agreeing a fee for an entire project, you may be expected to set a day rate for your services. Assess your competition and contact your relevant trade association for an insight into what your peers charge for their services. You may be able to increase your day rates if you are expected to work at night or the weekend, or if the job is a rush one and you can charge a premium for turning it around quickly.

If you have an end annual salary in mind, you can use this formula to calculate your day rate – but check the result against the going rate for your services, to ensure you don’t price yourself out of the market:

  • Work out the annual costs of running your business, including your salary – for example, £40,000 per year
  • Allowing for holidays and sick days, calculate a maximum of working days per year – for example, 200 working days per year
  • Assuming you won’t be employed on every day that you’re actually available, assume a percentage of the total days that you will be employed – for example, 80% of total working days, or 160 out of 200 days
  • Work out your day rate: £40,000 divided by 160 equals £250 per day.

Sources of funding

The funding available to start-ups in the C&F sector is generally that available to all new businesses. This should provide you with start-up costs as well as working capital to help you establish your business.

Personal investment

Most businesses need to provide some money for start-up costs – it can be hard to attract other funding without it. Sources include savings, inheritance, redundancy payments and equity from remortgaging your home. However, you will need to be aware that if the business fails, you are likely to lose this personal investment.

Overdrafts and loans

Your bank may be able to provide you with additional finance. In order to obtain either an overdraft or a loan, you will need to provide your bank with a good business plan, security (such as personal assets) and, if possible, a proven track record in business.

Equity investment

For smaller start-ups, investment from a family member or friend may be an option, although this should always be made official with a contract, to avoid fallouts later.

An option for larger start-ups, as it depends on attracting an individual or institution to invest money in your business in return for a stake in the company. If you want to cancel the arrangement, you will need to buy back your company stake from the investor and factor in an additional sum to provide a suitable level of return on the investment.

For smaller start-ups, investment from a family member or friend may be an option, although this should always be made official with a contract, to avoid fallouts later.

Grants

Your Regional Development Agency (RDA) and Business Link can provide you with information about grants and support services available to you locally. You may also be able to secure a loan from Peer Group Lenders, such as the Ethnic Minority Enterprise Network.

Government support

The Government’s Solutions for Business scheme can help if you have been refused funds from a bank or other investor. This includes Small Loans for Business, Finance for Business, Grant for Business Investment and the Enterprise Finance Guarantee. These initiatives are in England only; other support is available in Scotland, Wales and Northern Ireland.

Common pitfalls

Here are some common pitfalls you’ll need to avoid in the C&F sector:

  • IR35 legislation This legislation puts you at risk of being deemed an employee, rather than genuinely self-employed, making you eligible for higher tax and National Insurance contributions. You may also have to pay penalties and back taxes. You are at risk of being caught by the legislation if you are a sole trader or operating as a limited company and your work is controlled by your client to a large degree. Seek advice from HMRC, your accountant, or an organisation such as PCG or Freelance UK, to check your status.
  • Underestimating costs To make your consulting or freelance work viable, you’ll need to factor in ‘unbillable’ work hours (time spent invoicing, administration, marketing, etc) into your business plan, and work out how much you need to charge clients to provide you with the salary you require.
  • Late/lack of payment This will affect your cashflow and can have a knock-on effect on your personal finances, especially if you’re operating as a sole trader.
  • Disputes You may end up out of pocket if you don’t get agreements about what’s required from you in writing in advance of starting work. Ensure you agree a contract or brief to avoid the kind of mistakes or misunderstandings that can cripple your business.

Moneysense top five

  • Put a credit control system in place Check the credit worthiness of new clients; agree payment terms up front; and follow up invoices.
  • Set up financial systems It pays to invest time in understanding the most financially efficient way to run your business, or to hire an accountant who can do this for you. For example, it may be worthwhile voluntarily registering for VAT, to take advantage of the flat-rate scheme. Work out what expenses you can offset against earnings.
  • Agree expenses upfront This will improve cashflow, help you to keep records of your spending and avoid disagreements or negotiations with clients once the money has been spent.
  • Keep personal and business money separate This will help you to understand exactly what you’re spending and earning through your business, so you can spot any issues early and ensure you stick to your business plan. If you don’t want to run two separate bank accounts, at least keep clear records of your business spending and earning.
  • Agree payment in stages When working on a long project, agreeing to sign off and invoice for each stage of the work will provide regular payment and also protect you against failure to pay for the complete job.

How I did it

IT Consultant: ‘I work via an umbrella company’

Mark Harris is a test analyst, analysing software functionality

‘My typical clients are investment banks, local authorities and telecoms companies – basically any business that has software codes that need to be tested to make sure they do what they should. I search for contracts using a recruitment website named Jobserve (www.jobserve.co.uk), where agencies advertise contracts that can vary from one month to one year in length. Top agencies will also keep my CV on file, and ring me to see if I’m interested in applying for a job. They may also use networking sites such as LinkedIn to keep up contacts.

‘Once I’ve seen a job I like the look of, I send my CV to the agent, who will then hopefully pass it on to the company searching for a contractor. There are usually five preferred agencies that submit CVs to a particular company, and the company may see only two CVs from each agency, so even getting your information on to the desk of a potential employer is tough.

‘If the employer likes my CV, I’ll usually be asked to do either a face-to-face or a phone interview. As an example, I currently work for a secondary private equity group. To secure the position, I had one phone interview, one intelligence test, and then three more interviews before I found out I had got the job.

‘I could operate as a limited company, paying tax and VAT and employing an accountant at a cost of around £50 per month to keep my books and file tax returns, etc. However, in my business I’ve found it works best to use an umbrella company. Any contract is agreed between the agency, umbrella company and myself. The umbrella company takes a fee of typically 10% and pays me a wage and dividends based on what I charge for my fees.

‘As a contractor I agree a daily rate with the agency and it charges an extra 12% or so to the company employing me. I invoice monthly based on the number of days I have worked. As a Test Analyst, fees range from around £300 per day for insurance companies and the public sector, to around £500+ per day for City firms. However, the current financial crisis has sent rates tumbling – this profession is very market driven. Contracting can take a lot of nerve, as it’s possible to go a long time between contracts without earning a wage. But the higher fees make up for this. Using an umbrella company essentially takes the burden of financial management away from me and leaves me free to do my work.’

Virtual Assistant: ‘I expanded my business through sub-contracting’

Justine Curtis is founder of the UK Association of Virtual Assistants

‘I began working as a Virtual Assistant (VA) in 2003, using my years of experience as a Personal Assistant to establish my own business working from home. VAs offer a full administrative package to companies or individuals – anything, basically, that isn’t the core, moneymaking business. That can include services such as bookkeeping, administration, marketing, and managing emails and diaries. My clients include a surgeon who works in four different hospitals and needs me to manage his work diary; financial advisors; life coaches; and other sole traders. Since the recession, VAs are also increasingly hired on a project-by-project basis by small companies. VAs manage five ongoing clients at a time, on average, plus two or three others on a project basis.

The cost of setting up as a VA will be around £5,000 in the first year. Many VAs work from home, so don’t have to pay office rental. The start-up costs include buying IT and equipment (computer, printer, scanner, copier, telephone, internet access), plus marketing. Getting the word out about your business is essential to success as a VA, and internet advertising, networking groups and subscription to the UK Association of Virtual Assistants (UKAVA), which I founded in 2004, is a necessary outlay – a subscription to UKAVA costs from £24.95 per year, and includes member discounts and listing on our VA directory. At £97, paying for online VA training is also a good investment – UKAVA offers it through an organisation called the VA Success Group. The training provides business advice on topics such as invoicing, income tax and marketing, to complement VAs’ existing personal assistant skills.

Many VAs start their business on a part-time basis, while working in a permanent job, as they gain experience and establish a client basis – this is fine for jobs such as transcription services, which don’t need you to be available during office hours. Once up and running, VAs tend to work during office hours, so they are free to deal with their clients and their client’s clients. However, as you are your own boss, there’s a degree of flexibility in the times you work – not all jobs need you to be at your desk from nine to five.

I charge my clients £30 per hour. Generally, clients will book a block of time that they pay for upfront – a bit like a pay-as-you-go phone. I give them a breakdown of how the time was spent, and alert them when they need to pay for another block. A common mistake for new VAs is to start working before they’ve been paid for their time – that’s why I insist on being paid in advance. New VAs also tend to underestimate the amount of time they will spend on marketing before they will actually earn any money, and therefore neglect to set aside cash to promote their business.

The main advantage of being a VA compared with being an in-house personal assistant is that your wages aren’t capped. Full-time VAs can expect to earn between £30,000 and £40,000 per annum. However, it’s possible to expand your business and multiply your earnings by taking on associates to complete work for you. I have nine associates that I pay slightly less than the hourly rate I charge my clients. I subcontract them to manage my client’s work on my behalf, and in return I deal with all their invoicing. I’m also in the process of franchising my company, so I receive income from franchise fees. In fact, I deal directly with only one client now; the rest of my time is spent managing my associates and licensees. My earnings have risen in response to how my business has grown.’

Management consultant: ‘I work as a limited company’

Robin Ryde is director of Robin Ryde Consulting, a management consultancy specialising in organisational change and leadership development.

‘I set up the business in December 2008. I wrote two books on leadership while an employee but didn’t really have a vehicle for getting my message out and bringing them to bear on organisations and leaders. Setting up my own business seemed the perfect solution.

‘Although the business didn’t need much capital to set up, there were some priorities. Above all, I wanted some “just in case” collateral to protect me during the first few months of trading. The money I used to start was taken from savings and was equivalent to about six months’ salary. My start-up shopping list included professional, fully serviced office space, four laptops, Blackberries, printers, a website, professional indemnity insurance, and the cost of establishing myself and the business as an Associate of other larger firms.

‘Initially I wanted to keep things simple, so I established myself as a sole trader. But within a few months I engaged the services of an accountant, then set up as a limited company and became VAT registered. I selected the business model principally to be more tax-efficient, but also because it has slightly more weight and credibility than being seen as a sole trader. Another benefit of being a limited company is that it encourages discipline in handling the financials and management of the business. I have now brought in a business partner, which has also created more discipline in how we do business.

‘Charging for jobs is based on a daily rate and is consistently applied to all clients. There are a few variations to the standard charge where projects/contracts extend over a longer period of time. My starting rate has proved to be right for the market, although it inevitably took a lot of research and soul-searching to decide what I/the business was worth.

‘Most of the financial challenges in the early days concerned how best to manage money that will need to be paid out either in VAT or Corporation Tax, and making sure that we keep that money intact. In short, we have been close on finances from the beginning, always billing promptly and helping clients (who then deal with their own finance departments) to make processing payments to us as easy as possible. The area we initially neglected was, ironically, recording our payments as a business, which of course is nettable against VAT and Corporation Tax, so we lost a few thousand pounds unnecessarily in the early days.’

Freelance photographer: ‘I’m a sole trader’

Robert Griffin is a freelance photographer, specialising in travel, editorial and event photography.

‘I launched my photography business in 2009, after completing a training course in commercial photography at London College of Communication. After the cost of training, my biggest start-up costs were equipment – there’s a level of quality demanded by commercial photography that can only be supplied by professional equipment. An entry-level full-format professional camera body costs the best part of £2,000, with three companion lenses adding at least another £3,000, although you could spend considerably more than that. A photographer intending to shoot fashion or advertising work would need to invest in a medium-format camera that could cost anything between £10,000 and £40,000. Studio costs, rental of lighting rigs, etc, are also massive investments, but these chaps can bill out at £3,000 per day! A powerful computer is another significant expense – an Apple MacBook Pro computer can cost between £900 and £1,200, and most photographers will probably want to invest in a second, larger screen for post-production work on their images. The Photoshop CS4 computer package needed for post-production is priced at around £300.

‘A website is essential for promoting myself as a photographer, as it’s my shop window for clients. So far, I’ve invested relatively little money in this. I subscribed to a template provider and server, and did the rest myself – this can cost as little as £60 per annum, but you have to adapt it to your purposes, upload images and subsequently manage the content yourself. The alternative is to splash out on a bespoke site from a website designer. This won’t cost less than £1,000 and could be considerably more, but it’s a more impressive result for visitors.

‘I funded my start-up costs from savings and earnings from a previous business. I’ve chosen to operate as a sole trader, as at my current level of turnover there are no tax advantages to setting up a limited company to compensate for the additional expense. The relative simplicity of the sole proprietorship model also suits me at the moment. Contacts have been a huge factor in attracting business – responsible for nearly every commission I’ve received. It’s my responsibility to execute each job perfectly, hoping that they’ll recommend my services in turn. Commercial photography is an extremely competitive business and it’s difficult to draw attention to yourself in an open, saturated marketplace. Contacts and networking can make the difference between success and failure.

‘Charging can be a tricky area, and balancing a client’s expectations with my overheads and profit margins has been my biggest financial challenge during this start-up phase. I base my work on a standard day rate, although I’m prepared to offer a discount for several days’ work or a complete project. The Association of Photographers suggests £420 as a minimum day rate. This figure can increase, particularly in advertising and editorial, if usage rights for the pictures are negotiated. Top-end fashion and advertising photographers may charge up to £4,000 per day, with additional monies for usage rights, expenses, payment for assistants and studio fees.’

Useful contacts

Sources