How Much Will You Earn?
It's difficult to generalize about earnings for consultants. There are many variables, including experience, the marketplace, and the needs of clients. However, as an example, the typical independent consulting service operated by the owner without employees can soon sell about $80,000 to $120,000 in services in a year. That's earning a rate of $80 to $120 an hour, four billable hours a day, five days a week. The other four-plus hours a day will be spent on marketing and administration duties. Few consulting services start out the first year making that much, but most can do so by the second full year of operation.
One successful consultant was asked how many hours she typically works. Her answer: “Oh, I only work half-time — just twelve of the available twenty-four hours in a day!” Many new consulting business owners work even more, though few hours are billable. They are building their knowledge, expanding their network, contacting prospective clients, and developing their consulting process toward the day when they can work “half-time.”
How much profit should you expect to make? As a service business, much of your income will go to pay for labor. In a one-person office, that's you. During the second year of operation, your salary may be approximately 40 percent of income. That's $32,000 to $48,000 in salary for our example. Overhead expenses (rent, telephone, advertising, equipment) will take about 25 percent of your income. Direct expenses (books, subscriptions, office supplies) will typically take ten percent of your income. What's left over is profit: about 25 percent of income. Taxes come from this figure before you can call it net profit.
These figures are for your second year of operation when you have developed repeat and referral business, identified a target market, and purchased your primary equipment and supplies. Your first year will be more difficult as you build your business. During the first year, expect about 75 percent of your estimated second-year income and overhead to be as high as 40 percent of income. That is, if you estimate that second-year sales will total $100,000, estimate first-year sales to be 75 percent of that, or about $75,000. Your salary will be about $30,000 (40 percent), overhead will be higher at approximately $30,000 (40 percent), direct expenses of about $7,500 (10 percent), and profit before taxes of about $7,500 (10 percent) before taxes. Don't plan on getting it right the first year and you won't be disappointed.
You can build your consulting business part-time before going full time. You can select a specialty that pays better. You can set up your office in your home, which has numerous tax advantages. You can learn how to operate your consulting business even more efficiently than average. This book will show you how to use these and other advanced techniques for building profitability.
The numbers used in these examples are averages. During the first year, a business consultant may only bill 25 percent of available hours and a consumer consultant with both products and services to sell may be profitable after three months.
Overhead Expenses
Let's take a closer look at overhead expenses. The following estimates are guidelines to help you in calculating income, expenses, and profitability. For a typical consulting business, you should expect to spend about 40 percent of your income the first year and 25 percent in years after that. Where does it go? Rent will be about 10 percent of sales, office equipment and supplies will require another 5 percent, and your telephone/Internet connections about 5 percent. The remaining 20 percent the first year and 5 percent in subsequent years will go for advertising and promotion. The first year's advertising will cost more because you want to get your name out widely and because your advertising won't be as efficient. After the first year of advertising you'll know which media and messages work best for your market.
