Archive for June, 2012

When they baked your cake in little slices,
Kept your eyes on rising prices,
Wound up winning booby prizes;
I’m sure you’d like to think you know what life is

Lyrics from the Song “Valentines Day”, By ABC

Rising your freelance or small business rates can seem like a double edged sword.

On the one hand, inflation means that your costs are going up and therefore you should be charging more to maintain your profit level.   On the other hand, it may seem like there is a risk that by increasing your prices, it will make selling harder.

But then, if you are selling based on cost, there will ALWAYS be somebody willing to do it cheaper.  So are these the sort of clients you want to be attracting anyway.

Whilst it may be tempting to put off rate increases in these troubled times, delaying a rise could be the worst thing you could do.

Small Verses Big Rises
Inflation in the UK currently stands at around 3%, and at around 1.7% for the USA.

The rate of inflation seems to always be in the news at the moment – everybody knows that prices are rising because of inflation.  Therefore your customers will know that your prices will be going up (whether they admit it to you or not).  A letter of pending rate increases in line with inflation should be relatively easy for your customers to understand.

But, let’s assume that you decide to skip the rate rise for 2012 because you don’t want to hurt sales.   Come 2013, you could increase your rates by the rate of inflation, but that means you’re effectively taking a pay or profit cut.   Do this enough times, and you will soon be out of business.

On the other hand, if you find in 2013 that you need to get your profit levels up to the previous levels, you are writing a letter with your rates up by double the rate of inflation.

You customers will soon forget there was no rate rise in 2012.  You will have customers dropping off of your pending work book faster than you could deal with.   Imagine if you got a letter from one of your utility providers saying that their prices were going up by 6 or 7 percent – you would soon be shopping for an alternative supplier.

Get The Rise In the Diary
I would therefore encourage you to get the rate rise dates set into your calendar as reoccurring yearly events.   I have two dates in my diary for each year:

1. 26^th June – I write to all my current, old and prospect customers with the new rates, stating they will take effect from the 1^st September.  I find this is normally a good way to spur them into raising the orders.
2. 1sth September – Is the date of the rate rise.  I update my price list on my accounts system (Freeagent), my web sites and my printed material.   I also mark any outstanding quotations as void in my accounts system, so that I do not accept quotations with an old out of date value by mistake (good housekeeping in itself).

These dates are in stone.   It’s in my contract, and my customers are used to the dates.  Come the end of June, they know that a rate rise in line with inflation is on its way.

A good source of rise letter
Of course, there is a fine art in creating a rate rise letter.   I find the two stage approach (warning letter followed by the actual rise) works very well and rarely scares off prospects or customers.

Whilst the format of the rise letter is a topic for another time, there is an excellent resource of wording for such letters on the Intuit money form.

Yesterday, I had the pleasure of attended a freelancing workshop with about 120 other freelancers.  This workshop covered all kinds of subjects, from legal issues, to finding work, to working with agents and also finance.  It was an ‘advanced’ workshop – all the subjects were based around the assumption you had been freelancing for a while, so the presentations and discussions covered the more advanced aspects (such as better haggling with agents/clients/bank managers, dealing with difficult legal issues, expansions, overseas markets, etc).

As part of the freelancing discussions around finance, there was a general question asked – who in the group was planning for the ‘end game’?  The definition of an end game was left open – it could be retirement, or selling the business or emigration or even returning back to the (shudders) permanent employed workforce.   Out of the 120 people there, only five or six hands went up (mine included).

This was followed by another question – who has a pension in place?  Out of the 120 people, around 10 hands went up (again, mine included).

Good grief!!!  I was really shocked.

Pensions – Now and In the Future

Now I am not a financial expert, but let me throw some numbers are you.   In the UK, the cost of the state pensions (that everybody gets) costs the UK government £1.13?trillion of public money (2011 figures).   This is likely to increase every year by more than inflation.  By 2020, the IMF has warned that Britain may have to find another £750billion to add to the existing pension payments – and this does not even include the padded public sector pensions (for doctors, firemen, police, etc).  The picture is even worse in the USA.  In the USA, those that qualify for a state pension (not many by all counts) cost the US tax payers $3.7trillion, with around $450billion being added each year.    Frankly, these figures are unsustainable.

This means that if anybody is sitting back thinking that the state will look after them when they retire, they will be in for a shock.  Any form of state pension which does exist in the future is likely to be very basic indeed.  Phrases such as ‘token payments’ or ‘minimum life costs’ are regularly thrown around in pension discussions.   It’s also why so many unions are fighting the pension changes being forced through – all countries have to do some major cutting back on future pension payments.

In a nutshell, if you don’t want to end up spending your ‘golden years’ eating cat food, you should be investing in yourself now.

FTSE, NASDAQ, CAC and DAX are all falling

But we all know that pension pots (be they UK type of stocks investments, or the American 401K type plans) just wrap your money in the markets.  And we all have seen that since the start of the crash in 2008 (actually, since September 11^th 2001 if truth be told) that markets are all over the place.   Pension pots today are worth around 30% less than they were in 2008.   So investing in pensions is a waste of money right?  Wrong!!

First of all, it’s important to understand that markets should always be growing by their vary nature.   Take the FTSE100 – the FTSE100 index (the figure that normally reads 5307.5 (as it is today)) – this is the total value of 1 share of each of the top 100 companies by value in the UK.  So, for 5307p (or £53.07p), you would get 1 share in each of the top 100 companies.

But, the very fact that it is the top 100 companies means that they are the cream of the crop.  If a company does badly, it looses value and drops from the 92^nd most valuable company to the 109^th – it no longer appears in the FTSE100, and is replaced by something with more value.  Thus, by its very nature, the cream rises and the value of the FTSE100 (and all other markets) should be going up.

But here’s the thing – the value of the markets is only important if you are retiring NOW (when you have to cash in).   If you were going out and buying shares in a company – would you want to buy them when they are at their highest value/cost, or when they are at their cheapest?  If you had bought Facebook shares 24 hours after the float, you would have bought them at almost $42, whereas 48 later, they were worth less than $38.   To make money – you buy when they are low and sell when they are high – not the other way around.    Which is why having low prices now is great – more shares for your buck/euro/pound.

As I say, I am no money expert – but that is what pension pots are for.  They are managed by somebody who does know money, and will invest the money in the right stocks at the right time.

Pensions – the advantages

Now apart from the obvious benefit of giving you money to live on when you retire, pensions have one other major advantage – they give you extra money from your local government.   All of the European, UK and USA governments work their pension contributions in the same way.  When you pay into a pension plan (be it employer based, private or 401k), they will pay in the personal tax value of your payment alongside your own contribution.   So depending on what your own personal taxation percentage is (generally around 30% for most people in Europe or USA), for every £100/$100/E100 you pay in, your government will also pay in the equivalent of £30/$30/E30.   All they are doing is paying back the tax you have already paid on the income, but back into your pension pot.

There is no other form of investment anywhere which could make you 30%.   Yes, you are tucking your money away in a location you cannot touch it (until you retire), but you are getting your tax paid back to you as a form of additional investment.  Note: I understand that in the USA, the 401k is more of a flexible investment, and under some situations you can take money out of your 401k in emergencies.  More information here.

Also, having your freelance/small company making a payment into your director’s pension directly from your company bank account is another tax saving option.   As long as you stay within the maximum payment limits (£50,000 per year maximum in the UK), you do not pay any additional personal tax on the payments, and the company can take it as a valid reduction on corporation tax.  It’s a win-win-win situation – just get advice from your accountant or Independent Finance Adviser first.

What you need, when, and how much

Now, how do you know how much you need to save into a pension to know you can avoid the cat-food dinners when you want to retire.   Well there are too magic numbers to bear in mind….

1. Annuities – An annuity is the product you buy with your pension pot the day you retire.  The annuity converts your lump sum into your yearly or monthly pension pay cheques which you can spend.  The current magic number of annuities is 6%.  You will receive 6% of your lump some saved every year as a flat-rate (wont change with inflation) every year from retirement till the day you die.  So if you have a £100,000 pension pot, you will currently get £6,000 a year pension pay (£12k for a £200k pot, and so on).  This annuity figure is based on life expectancy tables – so the 6% changes over time and your specific situation (smokers who are expected to die sooner will get a higher % rate).
2.  Savings Ratio – The other more important magic number is the savings number – how much you should be paying into your pension.  The easy way to work this out is to take your age when you start your pension, halve your age, and that number is the percentage of your monthly income that you should be putting into your pension.  So, somebody who starts a pension when they are 40 should be saving 20% of their pay into a pension.  Now this can be a very scary number – but because the pension’s pot grows larger the longer it is working and saving, it is clearly better to start a pension sooner rather than later – the %s will be a lot lower.

Just for interest and information, I started my pension when I was 18.  I was not so good at paying into it (some missed payments, some reduced payments) until I was around 24 (then I hit it big time).  Now, I pay 20% of my salary into my pension – have done pretty much since I was 24 – so I am fairly happy I am on track.

All of this is then why I was so surprised about how many people at this freelancer’s day had not thought about retirement, and how few had pensions.  I guess they were just hoping (and praying) that the retirement-fairy would come along and sort things out for them, or that their numbers would come up on the lottery.   I was surprised – and a little scared for all of them (there were some jaw drops and white faces when the truth struck home).

Yes, times may be tough now, but times will be tougher in the future if you don’t have a pension.     I don’t know about you, but I don’t much fancy the prospect of eating cat-food sandwiches.  Do you?

More really useful information can be found (for UK readers) here.   If you don’t have a pension, or don’t think you are paying enough into it – please, avoid the cat food, and take action NOW!

A lot of the tools I use today are web/cloud based.  This is great in terms of functionality/flexibility, but can prove problematic when I want to transfer or quickly capture data.

I have recently discovered a FREE browser add-on called Table2Clipboard, a Windows, Mac and Linux  tool which makes copying tables from web pages to offline office applications a lot easier.

This browser extension simply adds a single item to the Edit and right-click context menus.  Right hand click anywhere on a table and options appear to copy the entire table, the column or row within the table.

But the best bit is that the option to “Copy whole table,” retains a table’s formatting and makes it far easier to paste and manipulate in Microsoft Word, Excel, Powerpoint or any other Windows/Mac software (including pasting into emails).

If you work with lots of browser based table data (such as FreeAgent, online banking, etc), this free utility is a life saver.

Recommended.

Let me kick off this brief discussion about the KISS system with one basic fact….

The more Complex Something is, the more likely it is that it will fail

Now let me expand on this with an example….

Let’s assume you have been tasked to design a prison.  This prison will hold just one inmate – for life.   So let’s start with the most basic of prison ideas.

You build a prison made up of four walls – the walls are 20 feet tall and 3 foot thick, with no windows or doors.  Into this walled box, you put the prisoner.   With no tools available – the chances of escape are very slim (other than somebody landing a helicopter in the prison or throwing a rope over the wall).  Its simple – it works – it’s almost escape proof.

But, you need to feed the prisoner, and give them a view – so you build a door and a couple of windows.  Now, they have a means of escape – the doors and windows become ‘weak points’.

So to compensate, you make it even more complex – now you have to place guards at the doors and windows, and complex locks.  But by making it more complex, so it becomes easier to escape – there are more options.  Locks can be picked, guards can be bribed.

So the cycle of making things more complex grows, until you have a system so complex that you have introduced 100 ways to escape, and another 100 ways to protect the 100 soft points.

The KISS principle in Business

I am sure you have heave of KISS – “Keep It Simple Stupid!”.   I often find that simple works – keep it as simple as possible, which leads to fewer problems in the long term.

Software for instance grows to be so complex with so many wiz-bang features that a program can end up with millions of lines of code, and millions of possible bugs.  Whenever a change is required, all of the actions of the software have to be considered to see what any changes will break – and things can easily be forgotten.  Which is why there are never ending patches in Windows and Microsoft Office Products.

Sometimes it’s too easy to get wrapped up with having the most features, buttons, menus, options, configurations, colours, languages, and choices.  But this means more time and cost for design, development and maintenance – and more problems for you and your customers.

So maybe, keeping things simple (at least to start with) is a design and sales tactic worth considering in your next project.