Mike’s Laws of Business

This is the first in a series of articles that I’m writing on How to Build a Consulting Practice.

Once upon a time, I wrote an article called “How to bootstrap a consulting business“. It was a good article and was well written for what it was designed to convey. The last line of the article sums it up pretty well:

“The hardest part about the process is having the willpower to make the leap into being self employed. After that, it’s really not that hard.”

If you want to get anywhere, you have to start your own business. It doesn’t matter if you do it alone, or if you have one or more partners. The most difficult thing to do is get started. And that gave rise to the first of Mike’s Laws of Business.

Mike’s First Law of Business: A business in motion will stay in motion unless acted on by another force.

Another way of saying that is that unless you stop thinking about what you should be doing and actually start working on your business, it will never get off the ground. When you work for a large company, there are a lot of cogs in the wheel. Not all of them have to be moving to make the whole business move. In fact, at any given time most of them are watching YouTube. But in most cases, it simply doesn’t matter. There are enough people working at moving the business forward at any given time that a lot of people can slack off and the business will still make progress.

If you’re a one man shop and you take a week off, guess how far your business moves forward? That’s right. It doesn’t. As your business grows and has more employees, it becomes easier and easier to keep the ball rolling, so to speak. But in the early stages, you need to really work at it and work hard to do it. If you don’t do something, there’s nobody else who is going to do it for you. So one of the most effective things you can do to drive your business forward is to keep moving and keep working.

Sure you need to stop on occasion to eat, sleep, and watch some stupid things on YouTube yourself, but always keep it in the back of your mind that you need to be driving the business forward.

Mike’s Second Law of Business: The relationship between the profitability of a consulting company measured by P is directly affected by the average expenses E, average billable hours B, the average billing rate R, the number of employees N and the average salary S. This is expressed as P = (B * R – E)/(N * S).

If your billing rate is $50/hour, you are able to bill for 40 hours per week, and your salary is $2,000/week, then your Profitability P is 1.0. That’s not good. It means you’re not making any money. Technically, you’re not losing any money either which is great, but you’re not getting ahead either or saving for a rainy day. If your profitability is less than 1.0, then it’s only a matter of time before you don’t have enough money in the bank and can’t pay your own salary.

Keep these numbers and ratios in mind because they will inevitably affect how well your business does. If you spend 10 hours in a week doing paperwork and only 30 doing billable work, you’re losing money. However, if you raise your billable rate by 25%, you can cut your average number of hours to 30 and still make ends meet.

With the exception of the monkeys running the US automakers these days, this math isn’t incredibly difficult and I would expect that any programmer worth his compiler can follow this formula. Don’t forget to factor in expenses either. It’s very easy to overlook other expenses there are to running a business. Rob Walling has a pretty good outline of many of the expenses that you will run into when you start your business, but probably wouldn’t think of until you got into it and started working for yourself. But don’t let that list scare you!

I’ve found that the biggest costs are not associated with hardware or software, but are the monthly fees you pay for insurance and taxes. Business insurance alone can cost more than $5,000. In the US, you will pay employment taxes that amount to about 11%-12% on top of salary, even if it’s your own. Profits at the end of the year will be taxed an additional 25% – 35%, depending on your tax bracket. When I first started out on my own, I was lucky enough to be able to depend on my wife’s job for her health insurance, which helped make my business wildly profitable.

Mike’s Third Law of Business: For every bit of business advice out there telling you to do something, there is someone else saying that you shouldn’t.

No matter what anyone tells you, myself included, take it with a grain of salt. Beware of people who say something is absolutely true without exception. As in, the only way to be successful is to run out and get Angel Investors or Venture Capital funding for your business. It’s simply not true. Success is a very subjective measurement. The guy down the street who barely makes enough money to feed his family, but loves what he does might not be successful to me, but he might very well see it that way. Each and every one of us will measure success in our own way. Some measure with money, others will measure by the number of customers, and some will even measure it by how long they haven’t had to work for “the man”. Personally, I’m coming up on 4 years for that mark. In fact, this is the longest I’ve ever had a single job.

So now that I’ve told you not to listen to anyone who speaks in absolutes, I feel safe in saying this. There’s only one person who can cause you to fail, and that’s you. No matter what else happens, and no matter what anyone else does, the only person who can make you fail is you. The economy may be terrible, but it’s been terrible before. Remember the 30’s? No? Me neither. Maybe it never happened. Who knows. But I do know that the world is still here, so it apparently hasn’t turned into Ghostbuster slime.

The only thing that means is that you are still in control of your destiny. People complain all the time that they don’t have time to do things. I’m guilty of this too. I complain about it virtually every day. But I saw a quote on my Google homepage reminding me that I have the same number of hours in a day as Albert Einstein, Linus Torvalds, Bill Gates and Larry Wall. It’s time that people come to grips with reality and stop blaming their failures on everyone else. People need to take responsibility for their own actions, or lack thereof.

I know this is going to be a little controversial, and in some cases downright mean, but if you’re not successful, then it’s your own fault. Period. Somewhere along the line, you made a mistake. That’s the bottom line.

There, I said it. Now if you find yourself on the losing end of the road to success, you have approximately two options. First, you can break down and cry about it. If that’s your chosen road, let me know. My sister has a PhD in psychology and might be willing to help you out. Unfortunately, you’re probably broke and couldn’t pay the therapy bills so that takes us to your second option.

If at first, you’re not successful, take a good hard look at what went wrong. Maybe it’s you personally. Maybe you just made some bad decisions due to incomplete information. In either case, once you’ve pinpointed the problem, fix it and try again. Persistence in the face of inevitable defeat is why everyone loves the underdog. Just don’t get carried away.