Freelancers, like all other businesses, benefit from having a budget, but many freelancers don’t take the time or understand the importance. Self-employed people are notoriously busy and frequently don’t spend time planning. Why? They see planning as an “administrative” duty – one that gets in the way of real work. “I’ll get to it when I have time”, they think to themselves, and that time never seems to come. Working on projects, the bread and butter of a freelancer’s life, seems more valuable than planning, which has less immediately tangible benefits.
A negative perception of “administrative duties” is an epidemic amongst we freelancers. I say “we” because I have been a freelancer for many years. I remember coming to the end of my first year of freelancing, taking my spreadsheets and receipts to my accountant and nearly falling over when I found out how much I owed in taxes. Why was I shocked? Because I didn’t plan. I did what many freelancers do. I promised myself I’d “get to it one day” and I never did. Some simple planning would have showed me that I wasn’t putting enough away to pay myself, pay taxes, have some kind of cash flow and a rainy-day fund for emergencies.
So, What is a Budget Anyway?
Simply put, a budget is an estimate of income and expenses and the resultant net revenue for a specific period of time. A budget is a forward-looking statement – a projection. Budgets help you plan for increased profit, better cash flow, and help you be better prepared for fluctuations in income and expenses. They might also prevent a heart attack at tax time because you’ll know what to expect.
The first step in creating a budget is knowing exactly how much you earn and spend over a time period (actual income and expenses are sometimes referred to as “actuals”). How you go about arriving at these numbers can be as simple as looking at bank statements of incoming and outgoing cash.
Flareapps.com small business tip #083Create a Budget
Actual income and expenses form the basis of budgets. You can average income and expenses over a past time period to determine a monthly average or use actual income and expenses from each month in a past time period.
Budget Based on Averages
You can create a “quick and dirty” budget based on averages.
You can calculate average monthly revenue and expenses from a past year or from a few months of bank transaction. The longer the time period, the more accurate your averages will be.
Break down your revenue (income)
For freelancers, this is usually the easy part. How much income did you deposit from services in the past year? Divide that number by 12 to arrive at an average monthly income. Income can come from sources other than business services earnings but for this example we’re talking about what you earned from your customers.
Break down expenses.
Tally fixed and one-time expenses over the same time period. Expenses might include:
- Internet and Web Hosting
- Telephone (landline and cellular)
- Cleaning supplies
- Janitorial services
- Administrative Expenses (insurance, memberships, software, accounting fees)
- Sales and Marketing
- Transportation (gas, vehicle insurance, maintenance costs)
- Travel and Entertainment (business related only)
- Interest Fees
- Bank Charges
When you have a total, divide it by the number of months in the time period to arrive at average monthly expenses. New freelancers with no prior operations will have to estimate expenses by calculating monthly fixed expenses and guessing occasional one-time expenses.
Don’t forget about sales taxes and income tax – estimate what you can expect to remit in sales tax. Consult your state/province tax tables to see what taxes you must charge and remit (if any). Estimate employment income tax by taking your estimated monthly income and entering it into a self-employment tax estimation calculator.
Add a rainy fund
What amount do you need monthly for unforeseen expenses? Although this is difficult to estimate, you should save some money each month the unpredictable.
Add vacation expenses
As a freelancer, you may feel like you can’t afford to take a vacation, but you certainly should plan for some time off. Even if your vacation is a “staycation” with daytrips or camping, estimate what you need.
After you have estimated monthly income, expenses and taxes (or other liabilities), calculate your net monthly income (total revenue – total expenses).
Revenue: $5,500 Expenses: (900) Sales Tax: (275) Income Tax: (777) ----------------------------------------- Net Monthly Income: $3,458
Now that you’ve arrived at Net Income, you can’t make plans to spend it yet! You should subtract your rainy fund, some kind of savings, and vacation.
Net Monthly Income: $3,458 Rainy Day Fund: (300) Savings/RRSP: (100) Vacation: (100) ----------------------------------------- Monthly Self-Employment Pay $2,958
This simple math is a good reality check. You know what you have to live on, and can feel good about having a buffer of savings, both for your business and for you.
Budget Based on Monthly Actuals
A more accurate and reliable budget takes into account the variable nature of income and expenses from month to month. The starting place for this kind of budget is actual income and expenses for each month in the previous period. A given month’s actual income and expenses would be the foundation for income and expenses for the same month in your budget.
See the Rolling Business Budget and Forecast Template for Excel (item 2 in the list) from PDFConverter.com.
Flareapps.com small business tip #084Budgeting Income and Expenses
For freelancers (one-person operations), knowing actual income and expenses is the starting point. Then, you project monthly income and expenses using the actuals as a baseline.
You can enter the previous period’s monthly expenses directly into your budget or you can determine that you’d like to reduce certain expenses by X number of dollars by the end of a period. For income, you might set a targeted monthly income you’d like to achieve by the end of the budget period. When projecting income, it’s important to be realistic. For example, if your income was 20,000 last year and you’d like to earn 25,000 in this year, you’d have to earn an additional $416.66 each month to achieve your goal. Can you realistically achieve this? Do you have a plan to achieve it?
There are many ways freelancers can plan for increased revenue and reduced expenses:
- Get more clients (network, advertise).
- Charge more for services.
Read “Why Avoid Low Pricing as a Freelancer?” and “How to Price Freelance Services“.
- Package services into subscriptions (so you guarantee income for a longer time period).
- Increase customer lifetime value.
It’s cheaper to keep and nurture existing customer relationships than it is to gain new customers.
- Outsource or partner with others.
- Shop for bargains, get cheaper vendors, use free softare, be more frugal.
For my freelance business, this meant using free software when I could, shopping for a better cellular phone plan, foregoing restaurants for lunches. See “10 Money Saving Tips for Freelancers“.
- Know what you can deduct at tax time.
See the IRS article “Deducting Business Expenses“. Freelancers should pay particular attention to “business use of home” and “business use of car” expenses. Remember to keep all receipts. It also pays to consult an accountant so you know you are deducting everything you can.
Creating a Budget in Flare
While you can use a spreadsheet to track income and expenses and create a budget, doing so is cumbersome and time consuming. It’s not a wonder then that many freelancers avoid budgeting. With the Flare budgeting feature, you can create a budget in minutes. Once you’ve done so, you can compare actual income and expenses with budgeted income expenses.
Creating a budget in Flare (no audio).
You can view the budget from the Budgeting feature and directly from Flare’s dashboard as shown below.