Thursday, August 10, 2006

Going down the freelance road

Gautam Ghosh is turning freelance. My best wishes and a ton of good luck to him; I'm a recent reader but his articles have"dum".

Gautam is now an "organizational consultant" which I guess is either organization of consulting or consulting with organizations, or maybe something else. And can be rearranged to form "Tantalizing or uncool Satan".

But I digress. The issue is that of moving to a freelance situation, and having given up a not-so-high paying job for entrepreneurship myself, I know a few of the pangs that one goes through in this situation. Let me elaborate.

People will call you stupid.
You're giving up a monthly salary for a completely random, no paycheck job. You're relying on the fact that someone out there might actually want to use your services, and basing your life out of it. You're also potentially sabotaging your corporate ladder growth for a fleeting passion; growth that would perhaps ensure that one day you will be given an award, a plaque and perhaps even a cozier chair.

Ignore them. The idea of giving up a salaried job is anathema to most people; and the idea that your income is transient will seem like a serious disadvantage. There's more to life than that, of course; passion and the need to do something is as important. But there's something the salaried folks are not likely to know: you can earn more money by hiking it on your own, and transient income is fantastic for personal life (holidays, free time and quality of life).

Building blocks are important
Most of us in salaried jobs are completely ignorant of what it takes to run a business, even a freelance one. You need an accountant for the finances. You need to get yourself an office (more about that later). Brochures for marketing; a responsive web site; Service tax registration; Company accounts; etc.

I will provide a more detailed post on how to go about this, on another day.

And you need the base stuff for your business itself. A freelance trainer will need to create course outlines, training materials and powerpoint slides. A consultant needs convincing marketing material.

The time you spend on this stuff is not billable - so you don't get paid for what can be really hard work. You've been salaried all your life and haven't known a situation when you don't get paid for hard work. Not easy to face. But you've already figured out by now that it pays off in the long run.

Not as much fun
The usual crib of the new freelancer is that they have to do some much "boring" stuff.

"I started out thinking I'll have so much fun, that I'll only work on what I want, and here I am filing taxes, making phone calls for payment, figuring out what colours look best on the marketing brochure."

This is part of a freelance life. My suggestion: Outsource what you don't need to do. Pay an accountant to make your service tax returns; get an ad-agency to do the creatives; hire a web designer. And for other painful tasks such as asking for money due - create models that reduce the pain; like advance or staggered payments, proforma invoicing, accepting credit card payments and so on.

I work from home
This is tough. Home is where you relax, or do difficult homely tasks such as hammering nails or cleaning the fridge. Home is where you hang out and see TV and curse the gazillion advertisements.

Home is not where you work. When you get to a freelancing situation your first feeling is: reduce rent, work from home. The money you save isn't worth two hoots if you can't get work done! So you have two choices:
a) Rent an office: This could even be a small place in a business center. This affords you the privacy of an office, and could have additional benefits like phone answering, faster internet connectivity, conference rooms, ability to call people over to discuss etc. Obviously, this is more expensive.
b) Designate an area for a home office: If you have a 3 bedroom house, consider allocating a bedroom as office space. Restrict your family from using the well accepted method of shouting your name and asking you where the cupboard keys are. Don't watch TV (unless you're a day trader in stocks) Consider this as your office - if this isn't getting anywhere, wear a formal shirt, tie and shoes to this room.

Working with family
If you ever start a freelancing business with your spouse, you're doomed. Well, not really, but it takes a serious toll on your personal life, a little bit later. Initially it's all hunky dory, like your pre-marriage days; and then it starts to dawn on you that you hate it when the excel sheet is not filled EXACTLY like that, and she hates you for creating that ridiculous looking destop icon.

You're going to have trouble working together, like any two people working together in this planet. The problem compounds because you see each other every bloody minute of the day - as a corporate slave, you didn't need to see your boss' face after office hours. And who do you crib to, mate? Not your mate.

One funda: Don different hats, and keep overlap to the minimum. One person does marketing, the other does delivery;One is responsible for accounts and the other for office supplies. Wherever there is overlap, ensure you know who's boss. If she's a better speaker, let her do the talking. If he's good at powerpoint, let him create the presentations. And never, ever, work from home.

Taxes: a pain?
To most freelancers the thing that hits most is the additional tax levels one gets involved with. There's Service Tax - a return must be filed every quarter. Then there's tax deducted at source (TDS), albeit only at 10% or so. And then there could be others such as advance income taxes.

Since freelancing begets "business income", freelancers are expected to provide bills for their expenses, provide numbered invoices, maintain cash flow etc. for tax purposes. This is a pain. Or is it?

Consider this: Business income is revenue MINUS expenses. That means your expenditure is "deductible" from your income. This is SOOOOO different from your salaried job where you would only see your money after taxes have been deducted.

Remember your good old car? You can now claim depreciation on it. Same for your computer, and your cell phone. You can expense your petrol bills, part of your phone bills, your electricity charges etc. So the comparison looks like this:



Annual Income



Depreciation on car


(not claimable)

50% of petrol bills


(not claimable)

Depreciation on computer, cell phone


(not claimable)

Other expenses (consumables, electricity etc. @ 5,000 p.m.)


(not claimable)

Taxable income



Tax @20% (approx)



The saving of bills and preparing of invoices is a small thing to do to save so much in taxes!

(You will spend a little more as a freelancer, but your income is also correspondingly higher)

Do you remember how wholesale and retail markets work? When you buy from a wholesaler (let's say you're a shop) you can get a deduction for VAT, and pay, in general, lower prices. When you buy from a retail shop, you pay high and then you pay VAT on that price too.

In terms of income, Salaried people pay taxes and then spend money. Freelancers spend money and pay taxes on the remaining amount.

Salaried people are retail. Freelancers are wholesale.

As all writers must, I will stop. All of you who are still here, you either have a lot of patience or you cheated and read ahead. So go on, start your freelance venture and don't hesitate to make mistakes.


Prateek Dayal said...

Good article

I recently attended a talk by Vincent Tsao of Linksys fame and he told that its actually a good idea to start a venture with you wife because you can trust them the most. If they make a mistake you know its a honest one.

Also the tax calculation is very interesting. But how do you cope up with it if you run your dad's car and have a laptop for which you lost the bill ? :)

Deepak Shenoy said...

Transfer dad's car to your name; it's a one day job. And for the laptop you don't need a bill; tell your accountant that you lost the bill, and put a market value on it.

I don't know if Vincent has started Linksys with his wife, but I know that trust is just one factor in the business. Being frank is the other. You can never be brutally frank with your wife; and you can never be the boss with your spouse. The consequences on your personal life are terrible!

How do we know said...

I got here from Gautam's blog, and thank you for hte very informative post.. i do understand this point... but still havent had the courage to take the plunge and do it.. maybe someday!!!