Best Practices for Freelance Business - Part 1

Doesn't sound very attractive, does it? Yet for many of us who are self-employed, that job description is all too true. The worst part of it is, unlike working stiffs, we can't even blame our troubles on the boss—we've done it to ourselves.

Don't get me wrong here, I love being self-employed, and could never imagine going back to working a regular job in a big company. But that doesn't mean that we freelancers can't borrow best practices from the corporate world.

The fact is, corporations work. The corporate form and culture provide a valuable dose of structure and organization. The problem is that the diffusion of responsibility that takes place in most big companies makes those organizations seem bureaucratic and out-of-touch. In many cases, outdated rules and regulations get enforced simply because, "that's the way we've always done it."

As entrepreneurs, we can sidestep that problem. To paraphrase the U. S. Army and Harry S. Truman, we are a staff of one -- and the buck most definitely stops here. We can revise our structures and rules when the changing nature of our businesses makes them irrelevant. After all, we are the boss, the employee, and the dreaded HR department, all rolled up in one.

In this two-part series, I've compiled what I consider the top ten ways that you can apply the best practices of the corporate world to your freelance business, to get the most out of your staff of one. This month, we'll discuss items ten through six.

Best Practice 10: Pay yourself a salary

As freelancers, we're often tempted to treat our time as free. It isn't, and treating it as such can cause us to make uneconomical decisions. For example, if it takes you 25 hours of work to win a $5,000 contract, and 25 hours of work to complete it, you're making $100 per hour, not $200. If someone offers you a $125 per hour contract, you should take it. That contract may be below your nominal hourly rate of $200, but it's above your real hourly rate (counting the time spent on business development) of $100.

You don't actually have to write checks to yourself, just keep track of how your monthly earnings measure up to your monthly "salary." If your earnings exceed your salary, congratulations! If you're running a monthly deficit, you should either lower your salary expectations or consider finding another line of work.

Best Practice 9: Offer performance bonuses and retirement savings

Incentives are incredibly powerful motivators. One wealthy father stipulated that his son would receive a bonus from his trust fund when he married. Naturally, the son got married 12 times!

You can also tap into these incentives. Sure, you can't actually pay yourself more, but you can reward yourself for accomplishing your goals. Your reward may be a vacation, a nice dinner out, or a new television. The point is to give yourself an extra kick in the pants to achieve your objectives.

Similarly, you should continue to invest for your retirement. You may not be able to offer yourself a 401K plan, but you can take advantage of a Simplified Employee Pension (SEP) IRA. While your contributions will be limited to a little over 13%, versus the 15% limit on 401Ks, you can contribute up to $30,000 a year to your retirement fund -- all of it tax-deductible.

Best Practice 8: Benchmark against the competition

There are always two sources of good ideas—you and your competition. Yet far too many of us seem to work in a vacuum, without taking the competition into account. It's harder to benchmark when you're a freelancer—unlike big companies, there isn't a lot of readily available information in the form of analyst reports and SEC filings. On the other hand, there's more information available than you might think. Ask your customers, past, present, and potential how you stacked up against the competition. Even more important, ask the customers that you lose—one loss provides more information about your weaknesses than all your wins put together.

Finally, though it might sound crazy, ask your competitors. Try talking to indirect competitors or potential collaborators. At my companies, I've always tried to develop relationships with at least three of my competitors. If I decide to pass on a project, I always try to refer the business to a collaborator or competitor—both the customer and the competitor end up owing me a favor.