Business of Consulting

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I was supposed to start writing again on August 1 but that heat wave we had really did a number on my ability to write. July and August were exciting months for Friuch Consulting and I wanted to start back into my writing schedule by sharing some of the things that have happened.

Our Office

Back in late June, I posted that we had found A Space of Our Own [LINK]. Shortly after making this announcement, I found out from the City of Vancouver that the lovely space we had found wasn’t zoned for office use. This was very disheartening because I really loved that space. Earlier this month, we thought we’d found another interesting space in Burnaby near Metrotown. That also turned out to be zoned improperly for our purposes.

I was starting to lose hope when I found a lovely space near Chinatown in Vancouver. It’s small but it’s in a beautiful heritage building and it’s walking distance from most things in downtown. We start moving in next week and I’m excited!

The Team

Friuch Consulting has welcomed a whole host of new team members in the last few months including two Angus Reid refugees – Eric Brooke (who will be starting on September 8, 2009) and Caroline Hickton. Sean Peters and Melissa Chungfat, who have been with the firm for a while now, continue to work with us and we’ve added some new associates who will be working with us on a project-by-project basis: Brandy Delves (Brandy Delves Consulting), Ray Walia (Apptastic) and Kirk Hutton.

We’re ramping up to take on a bunch of new projects in the Fall and we’ll be sure to throw a re-launch party so that old friends and new friends will have the chance to meet the expanded team.

Finishing up the Year

Now that we’ve got an expanded team, we’ve got some additional bandwidth to take on new projects. Research projects, communications projects, project management projects – you name it! We’ve got some amazing capabilities these days so if you’d like to learn more, drop us a line. We’d love to hear about your projects and how we might help.

This was the year that I started getting extra serious about my business and have been trying to grow it into something spectacular. Part of that exercise has involved me formalizing my business by incorporating and by getting a bookkeeper to help me make the most of my financial situation. Both exercises have worked well and I couldn’t have done it without the help of my amazing bookkeeper, Sandi McGill. Before I jump into the interview, I want to talk a bit about why I decided to stop doing my own books and why I decided to hire Sandi.

Before meeting Sandi socially, I wasn’t convinced that I needed a bookkeeper or that I needed to incorporate my business. After telling her how much income tax I paid last year (yikes!) it became clear that the time had come for me to incorporate. Incorporated companies, under the tutelage of an experienced bookkeeper, can reduce their taxes by a huge margin. Sandi had helped several other companies with their incorporation paperwork and I asked her to help me with mine.

Now that Sandi’s got me more off to a good start, she’s taking over the bookkeeping and is going to do my tax preparation for me this year. Part of growing as a business owner is knowing when to delegate to specialists and I have a lot of confidence in Sandi’s abilities. That and to be frank, it’s cheaper for her to do the books than for me to do it instead of generating billable hours. I’ve already referred her to several colleagues of mine and she’s still got room for more clients so if you’re in the Lower Mainland and need a good bookkeeper, check her out. [LINK] McGill Bookkeeping and Tax Services – bookkeeping and income tax preparation for businesses of all sizes.

Without further ado, here’s my interview with Sandi McGill:

Aaron: There are some tax advantages to incorporating over sole proprietorship, right? What are they?

Sandi: Yes there are definitely advantages to incorporating. Incorporating your company creates a separate legal entity. It keeps your personal finances and your business finances completely separate which is good when you are looking to borrow money.

There are also tax advantages to incorporating. A sole proprietor must declare all business income from January 1st to December 31st, on that year’s personal tax return. With incorporating even a one person small business can stagger the year end to allow for better tax planning. For example, if the corporation’s year end is January 31st but the personal tax return covers from January 1st to December 31st. By not declaring management/director salaries or shareholder dividends until sometime in January, the shareholder/tax payer can defer the business income to the next tax year or split the payment of income from the corporation to the shareholder/director in order to lower personal taxes payable.

Another tax advantage to incorporating is that the business owner (shareholder) can pay themselves in Director’s salary, dividends or a combination of both to lower personal income taxes payable but still show personal income. By paying dividends to the owner/shareholder the corporation also shows income. This helps both the individual and the corporation when looking to borrow money. Lastly, corporations pay a lower rate of tax on income, especially corporations with annual income under the small business reduction amount. For 2008, the small business reduction amount was $400,000.

Aaron: How much extra paperwork is involved? Can a bookkeeper help manage that extra paperwork?

Sandi: There is definitely some extra paperwork. First there is the actual incorporating. This involves an incorporation application and the adoption of a set of Articles of Incorporation. A standard set which is fine for most small businesses can be found on the BC OneStop Business Registry site [LINK]. There is a cost to incorporation of about $350 that is paid to the Government of BC when you file your Incorporation Application. Secondly, there is the Corporate Tax Return (T2). This can be found on the CRA website [LINK] or you can have a professional bookkeeper or an accountant prepare it for you. I recommend having it prepared by a professional as this is a rather lengthy return with many schedules and it can be a bit confusing. Although you can pay an accountant to do all this, a knowledgeable bookkeeper can help you at a much lower cost.

Aaron: What is the advantage of having a bookkeeper over doing your own books?

Sandi: The first advantage is that if you have a good bookkeeper they will better understand what you can and cannot deduct as a business expense. The Income Tax Act in Canada is a very large and confusing publication which is open to interpretation. There are many grey areas and a bookkeeper can help with that. Secondly, having a bookkeeper do your books leaves you free to build your business and earn money. This holds true whether you are a sole proprietor, a partnership or a corporation. A good bookkeeper can probably do your books in less time than you can because this is their field of expertise.

Keep in mind that if you take your books to an accountant, they actually have a bookkeeper do the books and they just review it. You may at some point have to have your books audited by an accountant but why pay the accountant’s rate to have your books prepared? It makes more sense financially to have a good bookkeeper and use the services of an accountant only when necessary.

Aaron: What should someone look for in a good bookkeeper?

Sandi: Well for starters you definitely want one that is knowledgeable but also not afraid to tell you they don’t know the answer to your question (remember Tax Act is HUGE and confusing) but will research it and get back to you. It is impossible for any bookkeeper or accountant to know it all!

Secondly, you want a bookkeeper that is accessible. Not 24/7 but at least returns your calls in a timely manner.

Lastly, I think it’s important that you find a bookkeeper that communicates well with you. Your bookkeeper should explain things you don’t understand but nicely. You definitely don’t want one that talks down to you. Ultimately, you need to understand what is going on in your company and on your tax returns. A good bookkeeper will provide you with monthly income statements and balance sheets once your paperwork is entered into the bookkeeping software.

Aaron: How many hours per month does a good bookkeeper need to spend on a company’s books? What does it cost?

Sandi: Well honestly that depends on the size of the business, how much paperwork and the state of the paperwork when it is given to the bookkeeper. Handing your bookkeeper a bunch of balled up receipts is going to cost more than if you have your paperwork a bit organized. Remember you are paying your bookkeeper the same rate to sort and file as you are to have them do your books. On average you are looking at between $50 to $150 per month plus about $25 per quarter per government sales tax and payroll filings. Annual tax returns can run from $100 to $150 for a sole proprietor and $400 for most small corporations.

Aaron: What’s the biggest mistake people make when they try to do their own books and taxes?

Sandi: They pay too much in income tax! Most people don’t take all the deductions that they are entitled to or they claim expenses that are not valid business expenses. Either of these mistakes cost you money, either by paying too much tax or by having to pay penalties and interest if you are caught making false deductions by CRA.

Update: I just left City Hall. The space isn’t zoned for what we want to use it for. Go figure! It’s been rennovated to be an office space and it’s zoned for “storage”. I’m leaving this with the landlord. If he can get it re-zoned by September 1, we might take the space but in the meantime, the search for space resumes! Who spends all the money rennovating a space without checking to see if it’s zoned for that use? WTF?

Effective August 1, 2009 – Friuch Consulting Ltd. will be re-locating its offices to South Vancouver near the scenic Oak St. Bridge! Working from home and on the road has been fine for us for the past six and a bit years but there comes a time when you need to get more serious and this is our year. We’re very excited about moving into our new space and once we’re settled in, we plan on throwing a friends & family open house so you can check it out and meet the whole team. Here’s the view from the office:

We’ll put our new mailing address up on the website once we’re moved in but if you want to check out where we’ll be on the map…

View Larger Map

June has been a very busy month for Friuch Consulting as we grow our practice. The blog, as a result, has suffered. I’ve only managed four posts this month (as opposed to my target – 12). I also experienced a very demoralizing drop in traffic the past four days that I need to investigate. My blog normally gets 100-200 unique visitors per day. Since Tuesday, less than 15 per day. I can’t think of a good reason why traffic would have dropped off so precipitously unless there’s something wrong with my tracking urchin. Update: I upgraded Wordpress on Tuesday and it stripped my urchin code out of my Google Analytics plugin. Doh! I’ve fixed it so we’ll see if that helps the numbers.

In the meantime, I’m going to put the blog into dormancy low gear until the rest of the team gets up to speed and can start writing more. The tone and flavour of the blog is likely to change as a result. My colleagues all have their axes to grind and favourite topics and we’re going to have a more organized editorial schedule to reflect that. This will start right around when we update the website content in early August to tell you more about our team, what we’re doing and where we’re going.

In the meantime, enjoy some sporatic postsings from me in July and look for a re-launch of the blog in August.

Forgive me father, for I have sinned. It has been 12 days since my last post. It’s been a busy 12 days indeed. I’ve been trying to get more organized as we grow Friuch Consulting into the number one management consulting firm in BC by 2020. We’ve got a long road ahead of us but we’re looking forward to the journey. Here’s what we’ve done in the past 21 days:

1. New Associates – Found
   

   Back in early May, we started the search for new associates [READ]. We had informal meetings with quite a few people and we’ve landed on someone who is going to be an integral part of the firm going forward. We’ll make a formal announcement in the next month as this talented individual ramps up full-time with us. We’ve also identified at least three other individuals who will be working with us on projects going forward. Again, we’ll make a formal announcement next month about these individuals and what skills they will bring to the firm in the coming month.

2. Incorporation – Mostly Complete
   

   Our incorporation paperwork was finally completed on June 18 and our Chart of Accounts has been set up with our talented bookkeeper – Sandi McGill. Sandi was a big help in walking us through the process of incorporation – I recommend working with your bookkeeper or accountant when you’re setting up your incorporation paperwork. There are considerations that a good bookkeeper can advise you through. We still need to get our new bank account set up but as of June 18, we are operating as an incorporated firm – six and a half years after Friuch was founded as a sole proprietorship. This has been an interesting transition for us and while it doesn’t really impact our approach to the work, it changes how we see ourselves. I guess we feel more “grown up” now.

3. New Office – Just Starting
   

   We have determined that for the next 18 months, we need an office space that can accommodate our growing operation. We’ve retained the services of Baljit Siekham from Alchemy Organizing to help us find and move into our new space. She’s got a lot of experience helping organizations of all sizes move into new space, furnish it and make the most of the space. We’re looking for space in South Vancouver, North Richmond and South Burnaby.

4. Project Management Software – Found
   

   As we grow, we need to kick our project management up a notch – more systematic and more organized. To accomplish that, we’re bolstering our Google Apps back end with Basecamp HQ. We’ve only been using the system for a few weeks but it’s great. Allows us to assign discreet project tasks to the team more clearly and lets us open up the project to our clients. Our clients and the team seem to be picking up on Basecamp really quickly. We’re looking forward to exploring this tool in more depth and will write a full review of the service soon.

5. Mission and Values – Work in Progress
   

   When we set out to build this firm, I set out a goal to build the #1 management consulting firm in BC by 2020. I got challenged on this simple statement by a friend. He posed some questions and I have some answers:

   Why do you want to be the #1 management consulting firm in BC?
   

   It’s all about people and helping people to be extraordinary. Together, we’re smarter and more innovative than we are as individuals. As we grow into the #1 management consulting firm in BC, we’ll be a powerful force for good in this community. The better our market position is, the more flexibility we will have to give back to the community and to be agents of goodwill and great work.

   What makes you different?
   

   We want to help people build. We don’t just advise. We get our hands dirty. We’ll work alongside our clients to explore opportunities and build something extraordinary. We’ll work as hard as they do and take ownership of implementation.

   What are your values?
   

   We do not align ourselves to any political parties, religious organizations or “schools” of thought. We approach every opportunity with an open mind and no pre-conceived notions. Every project and client is important – no matter what the scope and scale of the work. Every client gets our best work.

   We believe that there’s no such thing as problems – just opportunities we can help our clients exploit. There is always room to innovate and come up with something extraordinary. Our goal is to exceed the expectations of every client.

Today is June 1, 2009 and today is the day that Friuch Consulting officially moves from being “me” to “we”. I want to document how we move forward on my blog because I’m hoping we’re going to learn some things that we can share with you as we grow Friuch into a going concern. I’m going to start with a recap of how we got here and in subsequent posts, get into the mechanics of the business.

Although I tell people that I started consulting in 2003, I actually started freelance work in 2001 when I used to do marketing and communications consulting. I wrote copy for a safety company and the Institute of Chartered Accountants. By 2003, I had jumped into consulting with both feet and was focussing specifically on science and tech policy. Like many startup consultants, I was a sub-contractor to more well-established consultants until I started getting my own clients in 2005. It was only last year that I stopped doing sub-contracting altogether.

When I had started, more knowledgeable consultants had told me that it would take me at least three years to get established. They were right. It was 2007 before things started to go smoothly. After that, my reputation and body of work had reached a point where I was no longer scrambling for clients. Business was coming my way in droves. By early 2008, I could barely keep up with demand. The follow charts shows my daily billable hours over the past year (June 1, 2008 – June 1, 2009). The red line shows how many hours most salary employees work. My totals don’t include pro bono work and business development work I do.

I was turning into the harried Technician from the E-Myth books – working 70 hours a week and getting burnt out. Late last year, when I felt like I was starting to drop balls, I started sub-contracting to people to make the workload more manageable.

Right now, I’ve got two sub-contractors working for me and I’m still working way too many hours per week. I can’t keep doing this and I’ve come to the realization that I need to make the transition from worker bee to business owner in the fullest sense of the word. Although I’m keeping the Friuch Consulting branding, it’s almost like I’m starting over again with an established client base. To ensure that the company grows (with or without me) I’ve taken the following steps:

1. I am incorporating. I’ve already secured my business name (Friuch Consulting Ltd.) and I’m going to be filing the incorporation paperwork after consulting with my bookkeeper later this week.
2. I’m seeking advice from my betters. I’ve haven’t been shy about seeking advice from people that I admire. On Friday, I’m having coffee with Stacey Cerniuk from Annex Consulting Group and the week after that I’m going to chat with Don Ference from Ference Weicker. I need to learn from people who have had success building medium and large consulting firms and I’m fortunate to know some key players.
3. I’m trying to be a Manager. I am having my first staff meeting ever on Wednesday and I’m trying really hard to partially transition from Technician to Manager.
4. I’m looking for more help. The business is still growing fast and in the next month, I’m going to be spending more time with three individuals who I think have a lot to offer and a lot to gain by associating with Friuch Consulting. With their help, the company will expand and increase its capacity to take on new and exciting projects.

My goal for Friuch Consulting is simple – I want to build the #1 Management Consulting firm in British Columbia by 2020. That’s a ways off but we have a lot of growing to do between now and then. I’m going to track our progress starting today and keep everyone up to speed on where we are going because as we learn, I’m hoping we can help others who are trying to grow their businesses.

I learned an interesting lesson a few years ago when I was helping a friend sell a used boat trailer that was worth roughly $1,000. At first, we were trying to sell the trailer on Craigslist at a deep discount – around $300. We didn’t get any calls in four weeks. Then I remembered some of my grad school economics theory and said “let’s try premium pricing and see if that moves it”. We put it back up on Craigslist at $2,500 and it sold on the first day with three other offers as backup. Why did this work? Let’s check with Wikipedia:

Premium pricing (also called prestige pricing) is the strategy of consistently pricing at, or near, the high end of the possible price range to help attract status-conscious consumers. A few examples of companies which partake in premium pricing in the marketplace include Rolex and Bentley. People will buy a premium priced product because:

1. They believe the high price is an indication of good quality;
2. They believe it to be a sign of self worth – “They are worth it” – It authenticates their success and status – It is a signal to others that they are a member of an exclusive group;
3. They require flawless performance in this application – The cost of product malfunction is too high to buy anything but the best – example: heart pacemaker.

I don’t usually direct-quote but I couldn’t put it better myself. In the case of the boat trailer, people were pounding down the door to buy it at almost ten times the price we were willing to let it go for because they believed it the higher price to be an indication of good quality. You can try the experiment yourself next time you want to sell something. Be prepared to play around with the price. We lucked out by guessing the right price on the first try. Here’s an excellent example of premium pricing in action:

This is a tough market. Selling $2 hugs right next to someone giving hugs away for free. Why would anyone take the $2 hug? Either people would do it to piss off the guy giving the free hugs or they really want a hug and believe that the $2 hug is better. A third person could have taken this hug experiment a step further by offering $20 hugs. This would drive increasing business to the $2 hug in a strategy called “Goldilocks Pricing”. Goldilocks Pricing is when you put a range of product offerings in front of consumers with one base-model product, one mid-range product and one ridiculously over-priced product.

The theory is that the overpriced product will make the mid-range product look even more attractive to the consumer. The lower-end product does the same thing if it enhanced the perceived value for money of the mid-range product. So, if we had someone offering $20 hugs, it would drive business to the $2 hugs because the $20 hugs don’t seem like good value. As the guy in the video demonstrated, by highlighting the flaws of the free hugs, the $2 hugs seem like good value. While I don’t recommend mud-slinging to enhance your own business, you could have three people from your own company selling hugs and play around with these pricing strategies.

I’d suggest having someone relatively unattractive (like me) with garlic breath offer up $0.50 hugs. Have a clean and reasonably attract person offer up the $2 hugs and have someone ridiculously hot offer up the $20 hugs. I would bet money that at the end of the day, the $2 hug person would make the most money.

On my way into the office this morning, I was listening to news radio and was treated to a good news story – Canada’s labour market added almost 36,000 jobs in April. [READ] After months of major job loss announcements, this was music to my ears. He also said that self-employment accounted for a good portion of this growth – a fact that caught my attention. Then the announcer stuck his foot in it. He said “self employment is often seen as a sign of desperation in a weak economy”. I just about choked on my coffee. WHAT? Is this guy for real? I brought it up to my client when I got downtown and she said “I agree. Self employment is a sign of desperation.”

With all due respect to these narrow-minded individuals, self-employment is absolutely not an act of desperation. Anyone who thinks that starting your own business when the chips are down is a way to solve your problems needs to reassess that view. I think there are advantages to being self employed and risks that make it a hard road for anyone considering the move.

First and foremost, let me be clear – becoming self-employed is the hardest option out there when you need money to live. It takes in many peoples’ estimation; 10,000 hours or 3-4 years to build up enough experience and a reputation that will land you work consistently. There is no way to shortcut this. In the meantime, you could be making better money doing just about anything else. The money is not why people should become self employed.

I think that self-employment is a strategic decision and it’s not for everyone. There are definite advantages and disadvantages (taken from the Ontario Council of Agencies Serving Immigrants):

Advantages

• Independence, control and freedom from routine: Companies or individuals you work for are your clients, not your employers. As clients, they can state what results are expected from you, but cannot direct your work. You will want to satisfy your clients if you wish to receive more work, favourable referrals or better rates. But you are your own boss – you decide when, where and how to work to get the job done.
• Financial rewards: A business may become very profitable. Companies are willing to pay more to independent contractors because they don’t have the expensive, long-term commitments that they do with permanent employees, such as benefits, unemployment compensation and pensions. Independent contractors may also deduct business expenses from their taxes, which may increase their net pay.

Disadvantages

• Less security. It will be your responsibility to make sure you always have work to do. This means you may sometimes be without work and therefore income.
• No free benefits. You will have to pay for your own sick leave and vacation, fund your own retirement plans, and buy dental, disability and life insurance. Self-employed people are generally not entitled to receive Employment Insurance benefits.
• Paying your taxes. As a self-employed person, you are solely responsible for doing all the paperwork and paying your taxes on time. If you are an independent contractor, you will pay estimated taxes quarterly to pay your Canada Pension Plan contributions and income tax.
  

These are the kinds of things that someone needs to consider before becoming self employed. A cursory web search will turn up these results. Given these facts, how could someone turn to self employment out of desperation? You’d have to be desperate and naive. I think there’s a real opportunity these days for those who are brave enough to go the self-employment route:

1. Turmoil in the economy creates opportunities for project work that needs to be done quickly and effectively. Many organizations are laying off staff or do more with the staff that they have. This doesn’t mean that new projects stop coming up. When they do, many organizations turn to self-employed people to fill those human capital gaps.
2. There was a labour shortage before the economic downturn and in many fields, there still is. Anytime demand outstrips supply, there’s an opportunity for the more entrepreneurially-minded among us to profit.
3. Sub-contractors come cheap. Because there are more potential hires on the market these days due to economic turmoil, your selection of sub-contractors is greater now than ever. You still need to source quality people to help you grow your business but chances are they’re going to be cheaper now than when the economy is at its peak.

That’s my rant. I invite anyone who thinks that “freelancing” or “self-employment” is the easy route to comment here. I double-dog dare you.

Over one year ago (in April, 2008), I wrote an article about Consulting in an Economic Downturn [READ]. This posting got me some newspaper coverage in December, 2008 but has depressingly only been read 76 times. (WTF?) This posting takes a look back at what I said a year ago now that we’re starting to pull up from our economic nosedive to see if what I said at the time has proved out.

One of my main messages in that post was that when the economy starts to go down the toilet, you need to find a niche that’s poorly served and offer new services that can expand your client base. For me, I honed in on the fact that there’s a looming labour crunch on the horizon (2015-ish) and started working with government and NGO agencies that have a vested interest in solving this problem.

While I’ve only had three clients in this area in the past year, all three are new clients and have brought in an additional $60K in revenue in the past year. I’ve also learned a lot about this market pain in the past eight months and am working on some very concrete solutions for clients that will result in more clients and more revenues for Friuch Consulting going forward.

A phenomenon that I had not expected was for my business to increase during the past year. I took on a retainer contract to weather the economic crisis and in retrospect, I didn’t need to. The phone has been ringing off the hook. Repeat customers have been coming back this year for more work and new clients have been finding me online or through referrals. This has forced me (happily) to grow, taking on nearly full-time sub-contractors and planning for more growth going forward. [READ]

In talking to my good friend Geoff Hansen at Rocket Builders, his theory is that tough economic times separate the “pros” from the “joes” – meaning that clients are less willing to take chances on poorly established consultants. One of my clients recently told me that he was intending to use my services more in future because his company has a stable of 7-8 consultants they use but they’re all getting older and, in his opinion, less reliable. In the eyes of my clients, Friuch Consulting is less of a risk and more of a safe bet the longer we’re in business.

Obviously, that doesn’t help out anyone who is just starting out in the industry but, as I argued in the interview I gave to the Edmonton Journal – the economic downturn does not make starting a consulting business any harder than it normally is. For most people, it takes them 10,000 hours of work (3-4 years) before they are recognized as a professional in their field and enjoy the benefits attached to that. You cannot shortcut this experience requirement.

In closing, I would give the following advice to consultants that are worried about the economy and how it is going to impact their business:

Established consultants

It’s time to step up your game. If you don’t have a growth strategy or a plan on how to increase your client base, it’s time to write one. Get a website. Get out there and network your butt off. Get proper business cards.

New consultants

Now is as good a time as any to start but remember that the first few years are going to suck. You can address market pains just as well as an established consultant but you’re going to have to work twice as hard as them to prove yourself to new clients.