One personal trait that successful freelancers have in common is attention to detail. They pay attention to all aspects of their business, including finances. While it may seem obvious, ignoring finances or having only cursory knowledge can mean the difference between success and failure.
You don’t need a degree in finance to understand some very basic things about your freelance business’s finances. You need to care, and, you should care. Some freelancers believe that because they can count the number of monthly clients they have on two hands, know them all by name, and “have a sense” of what they earn or spend monthly, that this is enough. That casual attitude will work for awhile, but in the long run, it’s very dangerous and could lead to financial calamity.
What you should know about finance for freelance success?
- Average monthly freelance earnings.
Knowing average monthly income is very important to freelancers whose income tends to fluctuate month to month over the year. It’s a good figure to use for budgeting. If you know your average monthly income, you’re more likely to live and work within your means. You’ll have realistic expectations and will set realistic goals.
- Average monthly expenses.
Knowing your average monthly expenses is also a good baseline for making budget projections. If you know what your expenses will be, you’ll know what you need to earn and will be better able to manage cash flow.
- Fixed expenses.
Fixed expenses don’t vary monthly and are generally longer-term commitments such as rent, vehicle insurance, monthly payments (e.g. hosting, internet, cellular, insurance). If you know your fixed expenses, you know the minimum you absolutely must pay monthly to keep your business afloat.
- How much money you need to live.
Knowing your personal monthly budget will help determine what you need to earn to survive.
- How much your business profits.
Smart freelancers know how much their business profits are each month. After all, what you pay yourself as a freelancer can be expressed as a percentage of profits (after meeting tax obligations and paying expenses).
- How much you can pay yourself.
What to pay yourself as a freelancer depends on a few things. At first, the figure may be whatever you can afford after meeting expenses and taxes, but that equation doesn’t account for reinvestment OR savings. See “How to Pay Yourself as a Small Business Owner (the Exact Formula)” for a detailed discussion, formulas and a workbook.
- How much you’d like to pay yourself.
Dreaming is free, right? And, dream you should. How else will you work toward goals. You need to dream, project your future, then, get that dream down on paper and act to make your dream happen. Wait…this is starting to sound like a budget. Okay, it is. Budgeting is sort of like that, really. It’s a plan that helps you achieve a financial dream. What you’d like to pay yourself as a freelancer should be part of what you envision for your freelance business. Creating a small business budget is a great way to make your self-employment pay “dream” a reality.
- How much to save for taxes.
Taxes should not come as a surprise at year end. As a freelancer, you should know what to save each month to pay to tax authorities when taxes are due. You can get a good estimate from an accountant or bookkeeper, but 25-30% of your earnings is an oft quoted estimate.
- What you can deduct as a freelance business expense.
As a freelancer, you’ll pay tax authorities less if you know what expenses you can deduct. Consult a bookkeeper or tax authorities. See “Deducting Business Expenses” at IRS.gov for detailed information on tax deductions.
- Who your most valuable clients are.
Knowing who your most valuable clients are can tell you what types of services to focus on, and which clients you may want to give preferential treatment. It’s much easier to keep current customers than it is to get new ones, so knowing which customers brought the most value to your business is vital.
- Who your most costly vendors are.
If you make a habit of tracking monthly expenses, the mostly costly vendors will stand out. Knowing your big costs can help you make decisions. Can you reduce the expense? Can you do without it? Can you negotiate better terms with vendors?
Flare Can Help You Answer These Questions
Flare Cloud Accounting can help you answer most of these questions. Not only does Flare make accounting and finance for freelancer business owners easy, it provides invaluable financial information that can help guide your business decisions. Flare’s easy to use and it will make you a smarter, more successful freelancer.