About two weeks ago, Josh and I pulled off Caldera’s first-ever promotional event. While we while we were running around downtown Philadelphia shopping for the event, we had a series of funny conversations about what constituted a business expense vs. what did not. In my mind, the definition of a business expense is very clear. The buckets of expenses that are each of our income statement’s lines live very clearly in my consciousness, always.* However, Josh pointed out something I had never realized before: that’s not the case for most people. In fact, he pointed out, freelancers struggle to understand the financial management of their business overall.
It really got me thinking about the WordPress adage that all community members have something to offer, and most don’t realize it. But that’s for another day – today is a quick and dirty course on financial management for freelancers.
The challenges of cash flow are usually the main obstacle to most freelancers. Simply defined, the flow of cash is the money you get and the money you spend at any given time. Automating most of your interaction with your capital transactions will go a long way in helping you to concentrate on the more vital aspects of running your business. Let’s get one thing straight: financial management is not spending long hours in spreadsheets trying to calculate the amount you owe in taxes – it’s just always ensuring that you know how much you’re spending for both personal and business expenses. There are three simple steps to that:
- You need a separate bank account for your freelance business. It is worth the maintenance fee to keep your personal expenses separate from your business expenses (although, online banks are worthy of note – many quality options are popping up that are both affordable and service-rich). Most freelancers have this problem of not knowing and keeping a proper record of what they spend on either their personal life or their business life. It muddles your understanding of how well you are doing and where you can improve. Automate a clearer understanding.
- Create a budget. You need a budget. You need a budget. You need a budget. It doesn’t have to be overly complicated, but you must have an idea of about what you expect to come in, and about what you expect to go out in the process of executing business. Don’t overthink it: take 5 minutes to look back on what you have earned in the last few years (or months, or weeks – scale appropriate), then have a proper plan for the coming year / month / week. It might just have four lines: income, hosting, software, hardware. That’s a budget! Planning ahead for the future offers you the chance to organize and arrange your finances properly, and most importantly, to grow.
- Pay yourself first. If you’re just entering the freelance business, simply start by being mindful of your expenses on personal things as you delve deeper. Ask your friends in freelancing how they’re coping with spending. Then, as you exist as a freelancer for longer, start thinking about paying yourself a salary. Determining an amount of money out of whatever you earn as a freelancer that covers your personal expenses helps you plan for your personal life, identify overflow (or underflow), and again most importantly, organize your growth. Do bear in mind that you will pay your taxes and other bills like health insurance and the rest. It is advisable to set aside 25-30% of your earning in the beginning so that the end of the year doesn’t hit you hard.
The Advanced Basics
Once you’ve nailed the three essentials and have been freelancing for longer, it’s time to take it to the next level. Put aside time to look back on the past years of your total expenditures. You will get to know whether your expenses are going up or coming down every year. If they are going up each year, then you will need to factor that into your calculations of things you need and want. Your aim should be to make more money than you spend for each time period you look at. These are some of the considerations moving forward:
- Start tracking. Keep proper records of your earnings and expenses on a monthly basis. This will help you to know whether your earning/expenses are on schedule or not. It might look like a simple spreadsheet, budgeting software like Mint, or an accessible accounting tool like Quickbooks, Freshbooks or even the advertiser-powered-but-free-to-you Wave.
- Save, save, save. I know. You’ve probably heard this one in the context of personal financial management, and you’re pretty tired of it. Unfortunately, it’s a monster that keeps coming back. If you can, make it a priority to keep some of your earnings in a liquid account so that you can get access to it whenever the need arises. Freelance business is like other businesses, sometimes, there’s downturns in sales. Be prepared. In periods of abundance, when you’re enjoying higher earning, remember to set aside a greater percentage of your money for taxes, as well. That tends to be the most common “oops” that makes a freelancer wish they had a more robust savings account. Ensure that you keep it to settle estimated taxes when it’s due.
Don’t expect to know how to manage your finances overnight. Learning how to do that is a process. The more you put your concentration on it, the better you learn it. With these tips mentioned above, it will help you to be a good manager of your business finances as a freelancer.
*Is that weird? Am I a robot?