Many freelancers and contractors face a certain level of uncertainty surrounding their finances. Variations in what and when you get paid can make managing finances complicated. We’ve put together some money management tips to help you take control of your money.
Open a business account
If you’re a freelancer or contractor who operates through a limited company where you’re the only employee you can opt to use your personal account for your business in-comings and outgoings. However, it’s not the best idea for managing your business finances. Setting up a business banking account makes it far easier to create a viable budget and manage your business accounts.
It will provide you with one place to receive payments and pay out any pension money, tax and business expenses. A business account could simplify how you keep track of your ins and outs as well as being able to see how profitable your business activities are.
Project income and expenses
Freelancing is rarely synonymous with a stable income and changes in your contracts may mean fluctuations in monthly income. It’s important to have a monthly plan to control your business spending.
A good way to keep your budgeting in control is to project your monthly income and expenses by either taking an average for the year or to looking at spending with a glass half empty attitude (seriously). Look at the worst case scenario by projecting the lowest amount of income you might receive based on an estimate from previous months and years. Combine this with an expense budget in line with your most spend heavy month to date. You’ll likely always spend less and earn more than your projections which will leave you with a contingency for anything unforeseen at the end of each month.
If you estimate your income and expenses to an average taken from the previous 12 months (if you have worked a previous year) then this should also be an effective way of budgeting for the coming months. If your income is steady this is probably the best way for you to estimate.
Set milestone payments
If you work on lots of larger projects and are worried about when you’ll get paid, because usually you don’t receive your pay off until the end of the project, then setting milestone payments could be a good option to help ease the stress.
Many freelancers set up a contract when accepting work with clients to allow for payments along the timeline of work. So, instead of a large payment at completion, you would receive agreed sums of money throughout a project. These can be set at certain milestones throughout your project and can be based on key phases being completed to give your client peace of mind too. If your work is for a set number of hours or days then you can charge based on your time. If you have no definite way of splitting up the job then perhaps consider breaking it up into 25% blocks and charging for each of those to help maintain a steady income.
You shouldn’t be anxious about approaching your clients to suggest this option. Many companies will be used to operating in this way, provided they have an agreed set of deliverables at each phase of the project.
Finally, a contingency fund is a must in the event you suffer gaps between contracts. If you can manage to do it, having a fund to cover 6-8 months of bills and expenses could be a real lifeline. Hopefully you won’t have to resort to using it but just the security of knowing you’re covered for a period of time is a benefit in itself.
Having this emergency back-up will not only make you feel more secure and relaxed about your freelancing career but you’ll find you aren’t as desperate for clients, so if there are any you don’t feel quite right about then you don’t have to jump at the chance to work with them. The same goes for worrying if current clients can pay their invoices on time, you’ll have a fall back if they aren’t being punctual. Finally, you’ll have more freedom to explore other opportunities such as going to events or taking on some training.
There we have it, some handy tips to make your freelancing financial life more secure. If you have any other tips or ideas we’d love to hear them, comment below or tweet us @Kingsbridgeprof.