(This is the fourth column in Jim Olsztynski's series on the pros and cons of running your own company. Previous columns are available at www.snipsmag.com.) Another trap to which many fledgling contractors fall victim is having their spouses working in the business at little or no salary. Since construction is a male-dominated industry, typically the husband works in the field while the wife answers the phone, sends out invoices, pays bills and keeps the books.
They think of themselves as a team, and they figure this is a great way to keep costs down.
Think hard about this for a moment. Are they really coming out ahead?
If the wife is smart enough to run their business, she's smart enough to earn a salary managing someone else's office. So even if she's not getting paid, the company must factor into its overhead what's known as an "opportunity" cost. The unpaid time she spends keeping the family business books is time she could be out earning money working for someone else. Even though the owner isn't paying his wife, it may be costing them $30,000 to $40,000 a year or more. A spouse's services may seem free, but that's an illusion.
Yes, six-figure owner salaries are possible, but they almost never happen at the start. Successful business owners typically work very hard for many years, taking in modest incomes, before they build a business that supports an elevated lifestyle.
Another downside to running your own business is the hours you must put in. It's never a 40-hour-a-week job, and the first few years are the most grueling of all. Expect to put in a weekly 60 hours minimum and don't be surprised if it escalates to 70- and even 80-hour weeks during peak periods or when problems develop. Don't expect to take many days off, and forget about vacations for many years.
Family businessIf new owners have children, they better resign themselves to the fact that they are going to miss out on school plays, ballgames and other events that are part of growing up, events that can never be replaced. They can try their best to make time to attend some of them, but when they're starting out in business, it's very difficult to find the time.
Many of the hours owners work are going to be unpaid time. They'll be working 12-hour days and more, but many owners will be lucky to come up with five or six billable hours. The rest of the time will be spent visiting prospective customers to give free estimates, writing up job quotes, putting together advertising, paying bills and dealing with suppliers.
Let's be optimistic and say that during the first year in business, a contractor earns $50,000 in income before taxes and deductions. This is a realistic number. It's not exactly getting rich, but it's enough for most people to survive.
But what will it take to generate that income? A contractor would almost certainly have to put in at least 3,000 hours of work that year. This, too, is a realistic number, even a bit on the conservative side. It averages out to 50 weeks of work at 60 hours a week.
Now divide that $50,000 income by 3,000 hours. It comes to an hourly wage of about $16.67 an hour. How does this compare with what he or she could earn as an employee? In many cases, it's not much more. It might even be less.
And if they have a spouse working in the business without pay, they need to add his or her hours into the equation. Let's say a spouse is only needed part-time to keep the books, say 1,000 hours a year. Now divide that $50,000 by 4,000 hours. As a couple, they would be working for an average of $12.50 an hour.
This just deals with income. Self-employed people also need to provide health insurance for themselves and ideally some kind of retirement-savings plan.
And what happens if they come down with the flu? Who is going to handle the work? I've seen self-employed trade workers force themselves to work when they're so sick they can hardly walk. Serious illness is unthinkable. You better have terrific disability or worker's comp insurance. However, the truth is that most novice contractors don't have enough insurance - if they have it at all.
(Jim Olsztynski - pronounced Ol-stin-skee - is editor of Supply House Times, a sister publication of SNIPS. He can be reached at (630) 694-4006, or e-mail email@example.com.)