Keeping your contracting business going

Whenever I write about running a small contracting business I always get a whole lot of queries from people, so here’s some more advice (with a few true stories).

Don’t start up too fast; work towards the point of starting. Naturally, if you are unemployed anyway, just go for it. Dave was a young graduate engineer. He was with a large consulting firm when the crunch came. First in, first out – and he was out. They gave him one month’s salary in lieu of notice, took back the company car and cellphone and that was it. Dave figured that he couldn’t start off in the consulting business too soon, so he bought a ladder and some tools and a roof-rack, strapped the ladder to the roof-rack and set off in search of work. Since his rates were very low he soon got a few jobs and, after a while, was doing well. If you are in permanent employ the idea is to work towards your own business. Start accumulating tools and ladders and stuff you are going to need to start up. Have a plan for what you will use as transport and a cellphone when you do start up. Then give your firm plenty of warning that you are going and . . . off you go. Alan couldn’t wait to get his business going. He negotiated an overdraft with his bank (based on his monthly salary as a permanent employee). He had been unhappy at his work so he wanted them to suffer when he left. He waited until his company was deep into a big project and then told them he was going. He took his overdraft and put a deposit on a really nice 4*4 and some very smart new tools. He had a logo painted on the 4*4 and was ready for action. His bank was worried that he had become unemployed (they regard starting a new business and being unemployed as the same thing) and wanted to know when the overdraft would be settled. Alan waited to get some work from his old firm . . . and waited . . . while payments due steadily exceeded amounts received. After a few months you will get work and you can raise your rates to what is reasonable. You can calculate a reasonable rate by adding up all your expenses per month and dividing this by 80. Thus, if your bond, car, house salary, accounts and so forth all add up to R12 000 a month you must charge at least R150 an hour to break even. If the work is long-term, say a month’s contract, you can drop 20%. But don’t drop more. Routinely you can mark up material by the discount the wholesaler gives you – normally about 30%. But don’t charge more than you should, or less. Be consistent. Joey and Ian had gone on their own at about the same time. Ian was a consulting engineer and Joey an electrical contractor. One day Ian asked Joey to put a few lights in at his house. Joey did so, and refused to charge Ian. One day Ian phoned Joey up – there was a small contract which had to be done at high speed, after hours – could Joey price it? Ian was open-mouthed when Joey’s price came in at about twice what it should. He spoke to Joey, who pointed out that he had fixed Ian’s lights, hadn’t he? Ian was forced to try and persuade the client that the high price was justified. The client was fooled but thereafter Ian didn’t ask Joey for a price.

Joey often asks Ian if any more contracts are coming up – he made a killing on the first one. Bear in mind that there are enemies in a small business, and the first is your bank manager. Often Gillian would get a big cheque from the main contractor and then couldn’t pay the suppliers until the cheque cleared, often after five to ten days. Sometimes her staff went all the way to a supplier, but were turned away since “cash only until the account is settled”. She started issuing cheques as soon as the big cheque was deposited, figuring that the bank would balance the outgoings against the incomings. The bank didn’t. Sometimes she got nasty phone calls as cheques bounced. She found that it was much simpler to take the big cheque to a factor, who would cash it in return for 2% of its value. She then sent her driver to each supplier with cash. It’s a lot simpler than the bank, but she fears being mugged.