July 28, 2017

The Risks of being an Independent Consultant or Freelancer

This entry is part 2 of 4 in the series Independent Consulting and Freelance Secrets and Tips

Being your own boss is a goal many of us strive towards. In fact, especially in tough economic times many Americans choose (or are forced) to become self-employed. The comparison of a salary to consulting income is not trivial, and working for yourself is not all rosy. This article discusses some of the risks of being an independent consultant or freelancer, which have burst the bubble of many hopeful entrepreneurs, and even some very experienced ones.

Risks of Self-Employment – Lost Time, Lost Clients

Most full time employees have paid annual leave and annual sick leave. As an independent consultant or freelancer, you’re in the business of selling your time to your customers. If you take time off for vacation or to take care of a sick child or parent, or if you yourself wake up sick as a dog, you will not be paid for time you don’t work.

You may be able to make up for such lost hours by working more hours later on, but that assumed you have enough business to do so. If you lose your ability to work for a significant length of time, you face a potential financial disaster since you lose not only the income of hours not billed, but also many if not all your existing clients who may not be able to wait around for you to be available again.

Risks of Self-Employment – Business Downturns

Another risk you face as a consultant or freelancer is that you’re not covered by unemployment insurance. If work dries up (the self-employed equivalent of being laid off), you have no safety net beyond whatever savings you’ve put aside for a rainy day. To be prudent, as a self-employed individual you must set aside as much money as you can when times are good and business is booming to prepare for the inevitable downturn and allow you to ride it out without having to throw in the towel and look for a salaried position somewhere.

You must also constantly network and market yourself (two distinctly different activities) to make sure that when your current clients no longer need your services you still have money flowing in. To the extent possible, it’s best not to let any one client provide more than half of your revenue (less than 25% is even better), so the loss of one client does not wipe out your business.

Risks of Self-Employment – Health and Disability Insurance

Most employers offering employee health and disability coverage pay 80% – 90% of the cost of that insurance. As an independent professional you have to find your own coverages. Assuming you can find such plans for individuals, which is not always the case, it will likely be far less generous in its benefits, and cost much more than the employee portion of employment-based insurance.

The Bottom Line the Risks of Self Employment

As an independent consultant or freelancer you will likely be paid far more per hour than as an employee. After all, you have far less overhead expenses than a big corporation with many levels of management which eats away at the value you provide. The flip side of that is that you face far more risks than does an employee. Being prudent in how you set your hourly rates, how you quote fixed price jobs, how much money you set aside in good times, and being dedicated in marketing your services can mean the difference between great success and complete failure.

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Series NavigationHow to Compare Consulting or Freelance Rates to a SalaryHow to Set Your Hourly Consulting Rates

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