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Path to Freelancer Profit: Start an Agency or Stop Billing Hourly

In case you haven’t caught my recent posts, I’ve sort of inadvertently started an ongoing series.  I’ve now given it a category tag, so you can read the posts in sequence, if you’d like (though the tag shows them to you in reverse order).  This is another post in that series.

(Quick editorial interlude: you don’t see it in the comments, really, but A LOT of people are writing me direct via email/social media to comment about the series or ask questions.  I want to say that I really appreciate the feedback and enthusiasm.  And I also want to pre-apologize if I miss some things from you all.  There are dozens of you and one of me, and I do my best with the responses, on top of running our growing business.)

I’m not planning to recap the entire series history for each post.  But suffice it to say that, up to this point I’ve talked about how a “freelancing business” isn’t really a business and that moving toward business ownership in earnest requires you to reason about profit and think like an owner.

I’m mentioning this because so far I’ve basically just given you background information.  Don’t get me wrong — it’s important background.  But background nonetheless.

Time for Your First Concrete Action on the Path to Profit

So, I figured today I’d switch it up a little and give you a bit of decisive action: the first step along the path toward business ownership and profit.

It turns out the action itself is easy to summarize.  I’ll do it right now:

Decide whether or not you want to own an agency and have a “managing director” kind of role.

If the answer is “yes, then,” great!  You have your business plan.

If the answer is “no,” then you need a business plan.  And the first step toward having that plan is recognizing that you need to stop billing by the hour.

The agency vs. non-agency decision is simple to conceptualize, but it’s important to mull it over for a while. So much so that the only actionable ‘homework’ I’ll ‘assign’ here is to make that decision.  For the rest of the post, I’m going to explain why you have to make this decision.

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The Freelancer’s Condition: Quagmire of the Owner-Operator

So far in this series of posts, I’ve written about two topics:

  1. How freelancers aren’t really business owners (yet) because they’re not reasoning about profit.
  2. A deep dive into the nature of profit, which I heuristically described at money that you could make while asleep.

I want to follow those up by closing a loop I’ve kind of left open.

Throughout those two posts, I talked about the freelancer simultaneously (and inadvertently) occupying two roles: owner and employee.  They excel as employees, who earn money via salary.  But given their zero-profit model, they do terribly as owners, who earn money via profit (or appreciation).

Today, I’d like to delve into the owner-operator concept in a lot more detail.

I’ve talked about how you can reason about a freelancer’s profitability (or lack thereof) by trying to backfill everything the freelancer does.  But if you’re a freelancer or an aspiring freelancer, this is precisely backward.  Why take action and then hope it makes sense, when you can figure out the sense before taking action?

Understanding the owner-operator dynamic will at least help you avoid blundering into a situation with a low ceiling, and, ideally, give you a sense of how to create a profitable business from the outset.

Owner-Operator: A More Appropriate Job Title Than You’d Think

When I first hung out my shingle to moonlight, a decade ago, I gave myself a new job title as the owner of my “consultancy.”  You guessed it.  Owner-operator.

Proud of this, I told my dad about it, and he skeptically pointed out that this made me sound like I drove and owned a truck.  He suggested that I change my title to “founder and principal,” which I did.

To this day, I’m not sure why I conflated that title with something that independent contractors called themselves.  But I do think that, in my corporate naivete, I stumbled into a pretty good term for what they are.

Someone that buys a truck and makes a living transporting freight is certainly an “owner-operator,” by convention.  But I’d argue that so, too, is the freelancer.  Both not only have businesses where the owner is the operator, but also where you’d be hard pressed to separate the roles.

But let’s forget about trucks and freelance app dev, and consider a different owner-operator setup.

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Business Profit 101: A Primer for Freelance Software Developers

As I threatened in my last post, I’m starting something of a loosely collected series. Maybe I’ll even get organized and give them a WordPress category at some point.

If you missed the last post, it’s not exactly required reading, but it would help with context.  In that post, I explained that freelancers, however they describe themselves, aren’t business owners.  Not really.

And I went on to say that the primary distinction between business owners and freelancers is that the former reason about profit.  Freelancers simply plunder every last dime from their “businesses,” not understanding that this is salary, and thus a business cost, rather than profit.

But I didn’t dive too much into the nature of profit itself.

I would understand if you read that last post and said, “I get what you’re saying, but I’m not sure I grok.  Couldn’t I just arbitrarily say that my salary is 80% of what I bring in freelancing, and then 20% of it would be profit?  Problem solved, right?”

The answer is, “no, definitely not.” But I can understand if you don’t understand why that’s the answer.

In the most abstract sense, think of profit as money your business can make while you sleep (or, in general, while you don’t work). And you, as a freelancer literally selling your hours of labor, can’t make any money while you don’t work, 20% or any other percent.

But let’s clear things up in this post by examining a concretion.  I’m going to walk you through a very realistic app dev freelancing situation and talk through the ideas of cost, salary, and profit.  Hopefully that drives the point home.

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Freelancers Aren’t (Yet) Business Owners

The idea for this post started as an idea for a tweet, and actually grew into an idea for a series.  (Or, perhaps, even a book, in a world where I can semi-retire for a while and have more time.)  But, lest I get too ambitious, let’s start with just a post.

And let’s start that post with the tweet that popped into my head.

“Freelancer” isn’t a career destination.  It’s an intermediate step along one of two career paths.

Path A: Employee -> Freelancer -> Employee

Path B: Employee -> Freelancer -> Business Owner

If you’re not consciously on path B, you’re accidentally on path A.

Here’s a graphical representation, if crude ASCII arrows aren’t your thing.

Now, the problem with this as a tweet is that it would have invited enough legitimate questions and discussions so as to make me break with my normal Twitter conversational pattern of “sporadic, at best.”  I can picture the objections/questions now:

  1. What, exactly, do you mean by “business owner?”
  2. That’s ridiculous, I’ve been freelancing for 20 years!
  3. What, exactly, do you mean by “consciously?”
  4.  Aren’t freelancers business owners by default and by definition?

And so on and so forth.

So, rather than try to sort all that out in a flurry of confusing Twitter threads, let me lay out my case here.  That way, I can tweet my tweet and then just reply to it with a link here, thus preserving “sporadic, at best.”

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