Turning the Corner with a Side Business

A few weeks ago, I put out a call on Twitter and on Facebook for detailed posts that people would like to see. I got enough great responses that I’m going to fill the entire month of July – one post per day – addressing these ideas.

Tammy on Facebook wants to know about “How to know when your part-time small business can transition into your full-time income.”

This is an experience I went through in 2007 and 2008 and an experience I’ve discussed privately with several other small business owners. It’s a scary transition indeed.

For me, there were five real factors I looked at before deciding to make the transition.

First, could I do the work consistently over a long period of time? In other words, would I still want to be doing this in, say, five years? I asked myself this question in 2007 and it’s now 2011, so I think I got the answer here right.

This is basically a passion gut check. It takes… something to be able to write two personal finance articles a day every day for years. Whatever it is that you’re doing, can you see yourself doing it every single day for years? Is this something that excites you from the moment you wake up?

For me, I often start my days with such relish that I can’t wait to get started with the writing. I’ll write my posts (an average of about three per weekday all year long), plus other contracted writing, plus additional things I’m writing for my own enjoyment (like my sometimes-mentioned fantasy novel). I love to write.

Second, is there a way to consistently earn money from this work? As long as I can consistently write content of a reasonably high quality, I’ll be able to earn enough money to get by with my work. The Simple Dollar earns money from ad revenue, but I have several outstanding offers to write for other sources.

Unless the environment of writing online drastically changes, I should be able to earn at least a limited income from my writing online. This gives me a route to consistently earn money.

What’s your pathway to consistent income? Do you have an abundance of prospects for earning money, or are those prospects limited?

Third, are you able to market yourself effectively to find more work? Are you able to find new clients for your work? Are you able to reach an audience for your work? Are you able to grow both of these things?

This likely involves the use of things like social media, effective emailing strategies, and so on. Without clients, fans, or customers, you can’t make it. Without tools with which to contact them, you can’t build them up.

I had the advantage of already having a large audience for The Simple Dollar when I chose to play it full time, and the site itself incorporates a lot of tools for audience members to share the content, which further expands the audience. For many people, social media (like a Facebook fan page or a Twitter account) is the tool with which they reach and expand their audience of readers, followers, clients, and employers.

Fourth, do you have an extremely healthy emergency fund? Do not dive into a side business, freelancing, or any form of self-employment without some sort of significant financial safety net. If you can’t live for a few months without any income, you’re not ready to make that jump.

Going solo means that you don’t have the reliability of a regular paycheck to rest your head upon. Instead, you will be going through periods with a lot of income and other periods with little income. The only real way to survive that is to have cash on hand to supplement your income during the dry periods.

When I walked away from my previous job, we had enough cash in savings to survive for several months even if I didn’t earn a dime in income. I would not have walked away without that support in hand.

Finally, do you have a sensible grasp of your accounting needs? Paying taxes, continuing to save for future goals, and maintaining a working household budget are tricky things to juggle when you’re self-employed (welcome to quarterly taxes!). You’ve got to have a plan for keeping things in order or else you’re going to wind up not getting financially ahead or, even worse, finding Uncle Sam on your tail.

You’ll find a lot of solutions out there for this. For me, the best approach was to take every dollar I earned and split it in half. Half of it went into a “tax” account and the other half went into our normal household account. Each quarter, I would pay income taxes out of the “tax” account, and I’d make up any shortfalls at the end of the year out of that account. Anything left would be rolled back into our household money.

You may find a different solution that works well for you. However, if you don’t have a clear plan in place for all of this, you’re going to run into some serious problems down the road. This must be in place before your business is large enough for you to seriously consider making the leap.

Cover these bases thoroughly and you’ll be in a much better position to transition from side business to full time concern.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. Johanna says:

    Sixth, do you have a spouse with a real job and health insurance benefits?

  2. valleycat1 says:

    Accounting needs – don’t forget that you will also be responsible for paying all your own payroll taxes – that first full payment of social security takes a lot of people by surprise.

    I would like to add that not all part-time small businesses are web oriented; in that case,in addition to social media, you need to do whatever it takes to build community contacts (beyond your friends & family)and create a presence in the community. Join professional associations (or start one) or offer your services to speak at their functions; if applicable, provide donations to fund-raising raffles, or help sponsor local events, etc.; buy ad space where it works best for you (newspaper, online local news, radio/tv, ad space at a local sports complex, in the local orchestra’s season program, etc.); keep your business card handy; wear your logo on a shirt/blouse/cap/scarf and put your business’s bumper sticker or decal or door sign on your car; do a promotion that will generate word of mouth publicity.

  3. Yea. Health insurance should be a major consideration. If you can’t find health insurance or have a spouse that has good health insurance, you might be in trouble.

  4. Kate says:

    Too true, Johanna, that entrepreneurship in our present society almost mandates that the spouse have health insurance, especially when one has small children.

  5. Kristen says:

    Trent, you say that you put half of whatever you earn into a savings account specifically for tax payments. It surprised me that taxes would be such a high percentage. Are your taxes really close to 50% of your income, or do you end up with a substantial amount that you roll back into the family budget at the end of the year? Can you go into a little bit more detail about what else you pay (if anything, besides taxes) out of this account (in other words, is it just income tax, or also SS, health/medical/life/disability, etc?). For me, all my payroll deductions combined (401k, fed/state taxes, insurance) ends up being about 32% of my pay, so the 50% number you’re using just seems really high.

  6. Benjamin says:

    Good advice Trent, thanks! I’ve been slowly but steadily growing the revenue from my own blog (linked in my name above)but I still have a long way to go before I ever think of quiting my day job.

    I have a dream too of working less in my “day job” and writing more, but I still have quite a ways to go! My next goal is generating more quality repeat readers to my site rather than relying on search engines (Google, Yahoo, Bing, etc).

  7. Snowy Heron says:

    Kristen – I don’t know how much Trent makes, but he is being prudent by putting that much away. Congress changes the tax code so often these days that it is impossible to predict what you will owe each year. Not to mention their definition of the “wealthy” changing practically moment to moment! Also, please remember that as a self-employed individual, he pays 100% of what goes to social security, not the 50% that would come when working for someone else.
    After I do my taxes each year I add up all the taxes I can track that my husband and I have paid – federal, state and local income taxes, property taxes, social security, medicare/medicaid and property. I don’t have any way of figuring what I paid in sales taxes, but I do live in a relatively high tax state so it is probably quite a bit. It is sickening to see all that money go out, and then read the stories in the paper about the do nothing jobs the politicians give their friends, the kick backs from contractors to get overpriced government work, the exorbitant benefits that government employees get that we in the private sector can only dream about. I wish I knew the answer.

  8. Liz says:

    I too put 50% of what I make freelancing into a savings account for taxes. Whatever is “left” goes into an IRA for my husband, since his employer offers no retirement plan or benefits whatsoever. They don’t even take out all the taxes he has to pay (the 1% local taxes, but it adds up). I’m lucky that my employer has a great retirement plan and pretty good benefits. I’d love a high-deductible plan, but that’s not an option.
    But I’m the one working 75-80 hours a week because we could make it with my “side job” (and his work) if it weren’t for the health insurance. 35 hours a week for the benefits, the rest freelancing at the work I love to do.

  9. valleycat1 says:

    The Small Business Administration provides good support & I recommend searching them out.

    Preparing a 3- or 5-year projected cash flow spreadsheet is a very useful exercise. For one thing, it makes you think pretty specifically about how you will grow your business in addition to how you will make it financially (often done in conjunction with a business plan, which too many people skip). It’s best to go conservative in projecting income and be generous projecting expenses.

    If you’re not clear on what a cash flow sheet looks like, there are samples online (the IRS schedule for business income gives a good starting point for categories):

    For each month or quarter, project all your expenses (including how much you plan to draw from the business as income – which probably means preparing a personal budget too; prorating any annual or infrequent expenses, such as taxes or major purchases; and planning a generous ‘other’ category for items you haven’t thought of) & when they will hit, and all your realistically anticipated revenue on whatever schedule it will come in. In a lot of businesses you are spending money well before you receive the income. Then at the bottom, you start the first time period with your beginning bank balance, add revenues/subtract expenses, and move the resulting cash balance forward, and repeat through the entire time span. This will give you a very clear picture of the minimum savings/capital in hand you need before you make the plunge.

  10. Allie says:

    @Snowy Haven, #7:
    Do you actually know any government employees receiving exorbitant benefits, or is this just, as I suspect, a talking point people use to demonize public employees? Because my benefits are laughably non-exorbitant.

  11. Snowy Heron says:

    I live in the Washington, DC area, so yes I do. Try calling a federal government office on a Friday – and you will maybe get a staff assistant to answer since many are taking the day off. The police dept. in my county has some peculiar work rules – for example, even though the union has gotten the county to put laptops in all of the police cars, the county cannot require the police officers to look at their e-mail!! And the police officers can get full retirement with some of the most insignificant health/disability issues you could possibly imagine. And these are the issues that have made the headlines in the papers. There are the odd little back stories that come out as well from time to time.

  12. Allie says:

    I actually meant did you know any of them personally.

    And okay, a person in the state government office where I work takes every other Friday off – as unpaid furlough, because we are encouraged to take unpaid furlough as a budget-cutting measure.

  13. Evangeline says:

    #11 Snowy Heron– I’m not exactly sure as to why you are upset that government employees can take a Friday off. Yes, it may be inconvenient for you, but it isn’t against the law, nor is it what is truly wrong with our system. Government employees are like you. They are allowed to take their vacation days as they want, provided it is allowed by their supervisor. Let’s say I go to the utilities department to pay a bill and there is a long line because someone is out for the day. I can be frustrated that it slows me down but being angry is unreasonable. Government employees have their own set of problems the public sector cannot relate to, so it’s best not to judge. In fact, I would say most jobs are like that: unless you’re in that particular field, you really can’t know all the details.

  14. cc says:

    i’m also surprised trent is putting away 50% of his freelance income for taxes. i’m a freelancer and i put away one third, and then i usually have a small balance at the end of the year (yay, a “refund”!).

    also regarding health insurance, depending on your area there are different options, in nyc the freelancer’s union will let you sign up for some pretty good health insurance. you have to apply and show that you’re a serious freelancer (tax docs, invoices, etc) but it is a great resource.

  15. valleycat1 says:

    I can think of several scenarios where it makes sense for Trent to keep 50% set aside. Whatever makes him more comfortable….

  16. deRuiter says:

    Let’s see, anyone at the USPS who has been there some time gets five weeks vacation (my friend works for USPS, 20 years) plus she gets 10 paid holidays off, plus sick days, plus personal days, so we are talking seven weeks vacation and more. Teachers get an entire summer off, week at Easter, week at Christmas, paid sick days, sabatical for a year potential, free health care for life, impressive pension, often after as little as 25 years. The problem is that in private industry, shareholders, the board, competition in the industry hold down massive benefit packages and salaries. In the public sector, the unions for public workers have no push back. The politicians OK every benefit and pay raise that comes up because the public sector unions kick back major contributions to the political campaigns and the political parties, there is no curb on the benefits. Every time the politicians grant public sector unions more benefits, they are guaranteed more political contributions and more votes for their campaigns. Public sector unions are corrut organizations which exist to milk the private sector workers (those who actually produce something besides “regulations” which magically require more government workers to supervise and implement) for generous union benefits and political contributions (mostly Democrat) for those politicians.

  17. Johanna says:

    Oh, the horror! Public-sector employees get to take days off! Private-sector corporations have no use for people who take days off! To remedy this massive unfairness, we must eliminate all public-sector rights forthwith!

    More seriously, why in this situation isn’t the outrage over how private-sector employees *don’t* get to take days off? Why can’t we be a society that sees workers’ well-being as a desirable goal in and of itself, not just to the extent that it makes the workers more useful to corporations? What does it say about us that that’s such a foreign concept to us?

  18. Kim says:

    DeRuiter. -Teachers don’t get paid for the days they don’t work. So yes we get summers and holidays off, but we don’t get paid for these days. We also don’t get free health care. We pay for it with each pay check like others do. We do get sick days and 2 personal days per year but no paid vacations days like you state. If teachers’ benefits look so great to you, why don’t you become a teacher too? Spend some time with me and you will probably change your mind.

  19. Brittany says:

    Hear, hear, Johanna. Also, 5 weeks after 20 years? That’s exorbitant? I don’t know many private sector workers who’ve been at their jobs for 20 years, but I know quite a few who’ve been there 10-15 years who get 4 weeks… 5 after 20 doesn’t seem totally unreasonable. Also, I am a private sector employee who’s gotten 3 weeks at both my old and new company as a /starting/ vacation package (the perks of working for companies who have a sense of the value of their workers as people). Also, pensions aren’t magical money that just appears–at least in Texas, government employees pay a mandated percentage (I think 10%) into their pension plan, so it’s less the purported “free ride” and more forced retirement savings.

  20. Tom says:

    My (private-sector, publicly-traded, multinational) company gives 4 weeks paid time off to brand new employees and 5 weeks at 3 years of service. I think its 6 weeks with 10 years of service. That includes your sick days, but we also get 2 “floating holidays” and 9 company holidays.

    I love when people talk about benefits at places they don’t work, assume their benefits are the same as everyone else’s, or assume that every public worker gets the same fat package of benefits as their local public employee.

  21. Roberta says:

    Re the ongoing comments about public section employees – Um, the USPS gets no public funds at all, by the way. They were privitized I don’t know how many years ago, so they are not government or public sector employees. And it’s also not true that private industry holds down salaries for everyone. The CEOs of many large companies have massive salaries, unbelieveable personal perks, and stock options and pensions which are enormous.

    I do know one public sector/government employee very personally – my husband. He had a master’s degree and 26 years of professional management experience before he joined his current government agency 8 years ago – and they paid him about $45,0000 a year to start, exactly what they paid the brand new college graduates with bachelor’s degrees and no experience at all. He is off every other Friday, but that’s because he works longer hours for the first 9 days of the two week pay period, and his agency allows flex time schedules to cut down on commuting time into the city, traffic congestion and exhaust emissions. He finds he is actually more effective with a slightly longer work day, and his coworkers don’t hesitate to call or email him if something critical comes up on his day off that can’t wait until Monday. His schedule also doesn’t affect public services since he’s a management analyst who doesn’t have direct contact with the public. He earns four hours of vacation time for every two week time period, so that’s 13 vacation days a year, hardly a princely amount. He could pay into a health care fund, but we use our other health insurance instead. He also pays into his pension account every pay period with a modest agency match, which many private section companies also offer. Also, since his agency does audits of other government services, their rule of thumb is cost savings each year of 10 times what it costs to actually run the agency. I’m proud of what he does, which is ensuring your tax dollars are properly and efficiently used to provide the services to which his agency’s clientele is entitled by law. I think he exemplifies what public service is all about – using his talents and skills in a way that benefits both the taxpaying public (of which we too are members) and the people his agency serves.

  22. Johanna says:

    Re Tom’s comment: My earlier comment isn’t meant to imply that I think no private-sector workers ever get any time off. I was exaggerating for effect.

    For the record, I work for a non-profit, and we get 3 weeks vacation for each of the first 5 years, and 4 weeks per year thereafter (where “thereafter” for me starts in about three months). Holidays and sick days are separate from that, but the understanding is that sick days are for when you’re *sick* – they’re not extra vacation.

  23. Katie says:

    He is off every other Friday, but that’s because he works longer hours for the first 9 days of the two week pay period, and his agency allows flex time schedules to cut down on commuting time into the city, traffic congestion and exhaust emissions.

    Seriously – this is how every government employee I know who regularly takes every other Friday off (and I live in DC too so I know a lot of them) does it – they’re working longer hours the rest of the time. And yes, many of them work more than 40 hour weeks with no overtime as a general rule as well.

  24. An giant emergency fund is NOT required to start your business.

    Typically, most people find that a 3-6 month emergency fund takes a long time–sometimes years–to build. DON’T let that stop you from starting and building your business.

    When your business has a minimum reliable monthly income–which should at least cover your monthly expenses–you can consider quitting your day job.

    Definitely continue building your emergency fund, but make sure that you have that minimum reliable monthly income from your business.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>