Runway: A blog about whether being self-employed or starting a business is a viable option financially

If an aircraft runs out of runway before becoming airborne then it will have to stop or it will potentially crash horribly. For this reason, runway is used as a metaphor for the relationship between the money available in a business and its running costs. If the business does not generate enough income to keep the cashflow up to cover costs, then it will either come to a stop or come to a horrible end. But unlike an airport, where sufficient runway already exists for the purposes of launching planes, with a new business you have to find or create the money that will hopefully let the business become self-sustaining. And unlike an airport, at which planes get up into the air uneventfully every few minutes every day for many years, most businesses fail within the first three years, often because of not being able to generate enough income to sustain the business in the longer term.

I think a lot of people in employment have fantasies about being self-employed or starting their own business. For clinicians, the fantasy is often about offering therapy in private practise to insured or well-heeled clients with milder problems. Whilst the hourly rates for private practise might seem attractive compared to a salary divided down into an hourly rate, the figures represent something really different. Salary is paid on leave days, bank holidays and when you are sick. It covers maternity/paternity leave and redundancy if you are no longer needed. You get supervision, CPD, equipment to use and premises to work in. You also have a team of other professionals supporting you in the background from admin to HR, finance, operational management, procurement and maintenance. You don’t have to think beyond providing the clinical and associated psychological services. Salary packages, particularly from the NHS, also contribute to very favourable life insurance and pension schemes. When you are self-employed you need to think about premises, insurance, supervision, CPD costs, DBS checks, accountancy, advertising, tax and how you will generate income if you don’t or can’t work. You may also need equipment from computers and stationary to psychometric tests (which are enormously expensive both to purchase and for record forms).

Remember that the bills need to be paid immediately, but clients may not pay you as promptly – and some may not pay at all. This is particularly true for me when doing expert witness work where the timelines from accepting the work to receiving payment for it are amazingly extended. If I accepted an instruction in principle on 1st January, I would typically receive instructions for it 1-3 weeks later. My appointments would take place 4-8 weeks after that, and my report would be submitted a fortnight later, perhaps in late March. There might then be further instructions or clarifying questions, before the case is heard at the end of May. Any invoices will only be processed when the case closes in June, and then sent to the Legal Aid Authority for scrutiny in July. If there are no queries the LAA then send payment to the solicitors, who eventually send it on to the expert in the August or September, though some will drag their heels for several more months. So I have to wait six to twelve more months to receive payment. And about 8% of the work is never paid, because the solicitors closes after the Legal Aid claim is made, or because the LAA determined that some of the work wasn’t “reasonable” or because there was a problem somewhere in the line of communication and one of the parties doesn’t claim a share of your invoice. Meanwhile the work is taxable in the financial year in which it is completed, and the VAT is payable at the point the invoice is issued. I also have to pay any staff who contributed at the end of the month in which we did the work.

Even as a sole trader working from home in a service industry with relatively low set-up costs, most of us need to earn some money to cover our living expenses, and can’t go for months or years unpaid. That means that unless you have a massive inheritance or lottery win to draw on, it might not be possible to give up salaried work to take the gamble of trying something independent. My rule of thumb is to have a minimum of three months living expenses saved before you consider leaving salaried employment. You might get this from a redundancy or mutually agreed resignation scheme, or by putting money aside whilst you are planning. You should also compare your current and projected earnings. My way of calculating this to calculate your annual salary plus 25% (the approximate value of the pension and protections) divided by 210 (the actual number of days an average NHS employee turns up to work). You can then compare this to what you think you could earn in a day if you had private clients, a contract with a large company to deliver training or services, a calendar full of supervision or consultancy, or whatever you imagine doing. You really need a multiple of three between the first number and the second to make being self-employed pay equivalently after costs, though if you really hate your job or are prepared to take a reduction in income (at least in the short-term) you might consider a multiple of two. I don’t believe it is viable to go below this because in my experience people never properly account for the amount of expenses involved, or the for the amount of non-income generating time required. As well as the fact that not all of your available slots will be filled until you are well established, it is worth bearing in mind that most full-time clinicians spend about 15-18 hours per week on direct clinical work, and the rest on work tasks that would be non-income generating in the private sector, such as screening referrals, setting up appointments, phone calls, email, supervision, meetings/indirect work, writing letters/reports, other admin and CPD.

That said, money isn’t everything. I know some amazing selfless people who have earned less than minimum wage for many years, but followed their heart because they cared passionately about what they were doing, and the impact it could make in the world. I’m not quite that altruistic, perhaps because I am the main earner for our family unit and feel an obligation to sustain our quality of life, but I’ve had to learn to live on a much less regular income. I pay myself minimum wage then supplement this with lump sums when the business is profitable. To make this even more unpredictable, I have often had to loan money into the business in order to pay salaries when others have been slow to pay us for work we’ve done. Overall I’d say my income is lower than when I worked in the NHS and did some court expert witness work on top, but nowadays on balance it probably matches my consultant grade salary. The amount I earn feels sufficient for our needs – and probably stretches a little further as some expenses have been absorbed (eg my mobile phone bill is paid by the company, as is the cost of any CPD I want, the costs of my accountant, and some little things like a sandwich and soft drink when I’m away from the office on business).

There are also some things that money can’t buy. I’ve loved the freedom and flexibility of being self-employed, even though there have been times that have been quite tough financially. Whilst it initially increased my workaholic tendencies to quite alarming proportions (peaking at working 9.30am to 6.30pm in the office and then 10pm until 2am at home most weekdays, and fitting in 5-10 hours of work per weekend), more recently I’ve been able to achieve more of a work-life balance. I’ve stopped doing as much consultancy and training that involved staying away over night, and reduced the court work that created so many high-pressure deadlines. I’ve started to cluster meetings in London once a month, arranging other meetings over videoconferencing where possible. I’ve withdrawn from the committee and policy work that was taking up a big chunk of my time. I’ve also recognised the wise advice of a past supervisor that said I needed to fill up life outside work with commitments that would compete with work, rather than expecting to ever be the kind of person who can ring-fence free time. So I’ve started putting social appointments in my calendar, made a commitment to swimming regularly, I’m doing more adventurous things with the children, and I’ve even been able to sneak out for the afternoon with my husband from time to time. Running my own business has also given me a chance to relocate to an area that I love, where my qualify of life and working environment is much nicer.

When weighing up the options, bear in mind that working as a sole trader can be quite isolating. In the NHS or other organisations we usually work within teams, often with the benefit of colleagues to bounce ideas off, or who can contribute to formulations from other perspectives. Working with others also allows you to collaborate or to delegate work to people with complementary skills or interests. It shares the risk of complex cases, and means you don’t feel solely responsible for the waiting list or the stuck cases. It can allow you to prioritise work and manage your workload. When you are the only one doing the work this becomes much more difficult, and the pressures and sense of responsibility for clients can increase substantially. Even though the waiting list might be shorter, you might feel more guilty if there is a delay in starting work with a new referral, or more responsible for ensuring a good outcome for everyone. When your income literally depends on how much work you do it can be hard not to end up over-working to the detriment of everything else in your life. However, on the flip side you can feel pride in positive outcomes, and a waiting list becomes a marker of success (that people are willing to wait for you) rather than a mark of failure like it is construed in the NHS (where there is pressure to meet targets, and services don’t have enough resources to keep pace with need, and are the only available option for most people).

You also need to realistically appraise your business plan. Most people go into business in the belief that they have found a niche in which they can earn a profit, and hope that demand for their services or product will arrive as soon as potential customers know it is available. However, that can lead people to be overly optimistic about how fast they can gain traction in the market, or the level of profit they can make. Unless the plan is to seek external investment, most small business owners need for the business to become profitable fairly quickly, and few would be willing to pour their life savings into a new business in the hope of a return further down the line. When trying to start up a company or expand a sole trader enterprise into a business that employs others it can often feel like a Catch 22 situation, that you can’t afford the things you need to generate the income that will fund the things you need. But unlike on Dragon’s Den or in Silicon Valley, few people have access to capital investment and most professionals (in the health and social care field at least) are wary about taking on loans before the business has the means to repay them, even if they can access lending.

My point is that even if you have a great business idea and an established reputation getting enough money to start and sustain a business is tough. Cashflow is a make or break issue. Generating sufficient working capital is one of several elements that challenge new start-ups. In fact, of small businesses that fail (based on figures from the USA), 82% attribute this to cashflow issues and 29% say that they ran out of cash, whilst 42% said that the issue was a lack of market need for their products or services, 23% don’t have the right team to deliver the business, and 19% can’t match a competitor.

I guess that makes me a survivor. I launched my small business seven years ago this month, and it is gratifying that we’ve managed to weather the politics of adversity to still be trading. However, making money is still something I find quite challenging. I’ve come out of a career in the NHS in which the financial transactions involved were far removed from my daily life, and the idea of making a profit was quite aversive. But I’ve had to learn to make my business financially viable. Whilst there have been times that have tested me almost to my limits, the business is still functioning and financially we are still on the runway. I view that as a success. However, I feel like we have never quite reached the position of being airborne, where the business is self-sustaining without me personally doing income generating work as a substantial proportion of my time – and that would be an enormous issue if I ever needed time off sick.

My penultimate piece of advice is to speak to people who understand business and finance before you embark upon your journey, and regularly as you go along. I’ve had the benefit of great guidance as I’ve travelled outside of the NHS and into the world of business. As well as my fantastic ongoing mentoring from Impact Hub, which has included some work on the financial elements of the business plan, I recently won a place on a scheme sponsored by Barclays bank to help social purpose businesses to scale up. I’ve been attending Judge Business School at Cambridge University with several other small businesses, where we have had a series of days to explore our options and make a growth plan for the business. Having identified gaps, I’ve then taken actions to rectify them. For example, we’ve built a website for BERRI so that prospective subscribers can see what our tools have to offer, and that has brought in a flurry of new subscribers. I’ve also explored the options to help me scale up more rapidly and increase the impact of what we can deliver. Thankfully we have a strong business case, and I’ve been increasingly able to articulate that as a result of the work I’ve been doing. Over the last month I have spoken to two potential sources of investment. That would give me more runway to play with, but I need to work out whether we are fully aligned in terms of the destination and route to get there before I can be sure that is the right move to make compared to continued slow organic growth.

My final advice is to recognise your own limitations, and to find ways to delegate the tasks you are not good at or not enthused about, and spend time with people who share your passions or the skills you want to grow. For me that means having an administrator who makes up and chases up my invoices, accountants who can deal with payroll, tax, NI, pensions etc and advisors who guide me to apply for the right grants, tax rebates and training schemes. I also meet up regularly with other social entrepreneurs to share our progress and plan collaborative projects. I just appointed an experienced Business Development Lead for the company, who I hope will help me to weigh up the options for investment, and help us to grow quickly but in a way that feels right and prioritises making an positive impact on the lives of vulnerable children over maximising profit. I’m hoping we’ll reach sustainability by the end of the year, but there are still hurdles to overcome, and even when we get into the air I can’t imagine it will be a journey without occasional turbulence.

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