Self-employment is about creating an asset

By ANGELA McCARTHY

You're keen to go out on your own, set up your own business. For what? Usually to be your own boss, have flexibility over working hours, keep your full charge-out rate and build up a business asset to eventually sell for a profit.

But while plenty of people become self-employed, few develop an asset, says Joan Baker, business consultant, wealth coach and co-author of Get Rich Stay Rich.

Business is about creating something with capital value, an asset that can be sold, and you can't sell a job, points out Baker. Yet many people set up or buy themselves a job, not a business, and many end up working a lot harder for less money.

Gosling Chapman director and Enterprise Training adviser Dianne Ludwig agrees. "People are shouldering the hassles of being in the business, such as administration, marketing, cash flow, but the business doesn't operate autonomously."

It is a trap Jane Kennelly is very aware of. As managing director of Frog Recruitment, she has been her own boss for 10 carefully planned months. Kennelly decided to set up her own recruitment agency after 16 years working for large companies such as Lampen Group and TMP Worldwide.

Setting up shop in a mature and crowded market is a challenge, but Kennelly and her business partner Chris Robson felt they could see gaps.

"My vision was to create a dynamic recruitment company with equal application to job seekers and clients."

The biggest challenge with setting up business is to find the "pearls that add value" and she believes the Frog after-placement programme is one such pearl.

To gain exposure among the 400-plus recruiters in Auckland, Kennelly got expert advice from a brand company on the business name and branding.

And one of her important goals is that the business can run without her involvement in day-to-day operations.

"By the end of next year I think we'll be there," says Kennelly, who got advice from Baker about creating a viable asset. As a result she has been setting up systems across all areas of the business to prepare it for growth.

"To have an asset Jane needs Frog to be a brand that becomes independent of her, a business that can be sold on because it can run without her, so it becomes something more than Jane Kennelly," Baker explains.

If your business is an asset it will carry on without you and continue to make money, says NZ Business Planners director Jamie Smith. But some self-employed practitioners find it difficult to relinquish control.

"It can be very hard to hand over part of the work to someone else."

Take the landscape gardener who is a perfectionist or a craftsman worried work quality will suffer if he expands his staff and who also hates spending time on necessary paper work.

"This shows he hasn't been training properly or setting systems in place," says Smith. "One resolution could be to employ a manager and give himself the title of technical expert. You get someone to help with the day-to-day running of the business so you can do what you do best."

Kennelly hired an office manager to manage areas such as cash flow and revenue.

"It isn't an area of interest or strength," she explains.

However, Gaelle Deighton, chief executive of economic development agency Enterprising Manukau, advises against complete delegation.

"It is your business and you have legal obligations, so you need to have full reporting mechanisms."

She recommends getting advice about setting up good management structures that allow you to work in your area of expertise without giving up central control.

Systems are an important aspect of growing a business, says Smith. Becoming self-employed need only involve buying a van and gear and lining up a couple of contracts to get started. But what happens if you get ill, weary of the work or want to retire? No matter how good the income from your charge-out rate, it all stops when you do.

"However, if you set up systems and structures, make things more tangible and take your business out of your head and put it on paper, then it changes because you're creating a process or framework that someone else can follow."

You need a business plan and a Swot analysis (looking at strengths, weaknesses, opportunities and threats), says Smith.

"You're looking at where the opportunity is to grow the business, where your strengths and weaknesses are. You need to also work out what the threat could be to growth. Businesses that struggle are usually not focused on the market and are not realigning the business to go where the opportunities are."

A simple way to work out how to add value is to observe a successful competitor, suggests Deighton.

"Sit outside the shop, watch their van, check out their marketing, ask around about their work and approach. Ask their customers what they like about what they do. You want to know why they're successful, how they differ from you and how you can differ from them."

So how do you figure out whether you're on the right track and growing an asset out of your self-employment?

Do you call yourself a business owner or a lawyer, hairdresser, architect? asks Baker. If not a business owner, then you're probably working in your business rather than on it and not developing it.

The defining line is whether you have the goal to grow, says Deighton. That is what puts you in a different space.

"It is an attitudinal thing. Some people never get it, but often, once people see that the goal doesn't have to be the equivalent of eating an elephant, they will go for it. They have just never been shown how to take steps and set goals before."

Professional advice can make a big difference for people in self-employment and small businesses, says Ludwig, who warns people to stay employed until they've had the robustness of their business plan checked.

You need a clear business plan, or action list, as Ludwig prefers to call it. Profitability is all important.

"Our job is to help people become profitable, for that is what the purchaser will look for, whether immediate or long term."

The key drivers of profitability are increasing market share, increasing prices, reducing costs and finding optimum capacity levels.

It is essential to properly work out pricing and costings, an area in which Enterprise Training runs workshops. And it isn't that difficult, says Ludwig.

"But if you don't get that right you're not working on big enough margins. Most people have no idea where their break-even point is - something you understand once you understand the process of costings and pricings. You can't just hope for profits."

Pricing work incorrectly is a common mistake, says Smith. A plumber who was being charged out at $55 an hour and getting paid $25 decides to go out on his own and charge out at $35. However, if he hasn't figured into that price business needs such as advertising, accounting and his administration time he'll end up in a financial spiral downwards.

"You have to start thinking as a director or co-director. Too many self-employed people still see themselves as the tradesperson or the technician rather than the owner."

While a lot of small businesses are valuable assets and making very good profits year in and out, a lot of people are working just as hard but taking only a minimal wage, if that, concludes Baker.

"It is all basic arithmetic. In developing a business, you have to look at how to get a return on time and capital as well."

And no, there is nothing wrong with just enjoying the flexibility and independence of working for yourself without any big intentions - as long as you're aware your income will dry up the minute you give up your tools, apron, pen or ledger. Most people hope for more.