Plan ahead and maintain a budget
A budget is an indispensable part of managing finances as a freelancer. It helps you to understand your yearly income and expenses. It also allows you to have better control over your cash flow and, as a result, enjoy improved financial stability.Creating a budget
The first step to budgeting is calculating your non-negotiable expenses. These are costs that are necessary to the running of your freelance business. These may include internet access, software subscriptions, website or platform fees, and rent payments. While you can include additional, non-essential expenses in your budget as well, it’s best to separate these from your main list. This is just in case there are some months when they are unaffordable. To get a clearer picture of your finances, you can use the 50/30/20 budgeting rule. To make things easier, a 50/30/20 calculator can help you figure out the exact amount of money you can use on your needs (50%), wants (30%), and savings or other expenses (20%). Next, you will need to forecast your income for the year. If you’ve already been freelancing for a little while or did so in the past, you can use this data to predict how much money you’re likely to earn in the future. If you’re brand new to freelancing, use the information you do have available. These are items such as your proposed rates, expected working hours and any current client leads, to estimate your income.Understanding your cash flow
In theory, your budget should give you a solid grasp of what your cash flow will be on a monthly basis. However, as a freelancer, your income can vary dramatically from month to month. Your forecast might not accurately represent the reality of your financial situation. While the total income you earn might be roughly the same as your predictions, you’ll likely experience peaks and troughs of work. This can leave you with more than enough money in some months, and very little in others. For this reason, it’s crucial to see your budget as a constant work in progress. Budget needs to be maintained throughout the year. Your budget will help you to identify when you should save money, and how much, helping you to prepare for when business is slow. Always have an emergency pot of cash that can be accessed. This is to cover basic expenses as well as a separate fund that will go towards taxes at the end of the financial year.Using accounting software
The best way to maintain your budget and manage your finances is by using accounting software. Instead of manually inputting your earnings into a spreadsheet and storing all of your invoices in a folder on your desktop, let accounting software automatically process all of your financial information. This will make managing expenses more efficient. It will also ensure that all of your calculations are accurate and that you are paying the right amount of tax. Depending on the package you choose, you’ll be able to see your monthly income and expenses at a glance. In addition, it will pull detailed reports to help you understand your cash flow. When comparing different types of accounting software, always think about the future. Some cloud accounting software providers recognise that a freelancer’s needs might change over time. Which is why you might have the option of upgrading your package. Rather than investing in a solution that might not be right for your needs, choose subscription-based software that offers more flexibility and can be scaled up or down.Separate your finances with a business bank account
If you’re transitioning to freelancing from being paid a salary at a full-time job, opening a second bank account might not have even occurred to you. Using the same bank account for your business and personal expenses can quickly become confusing. It can make filing your tax return a much longer, more complicated process. By separating your bank accounts, you’ll be able to quickly and easily identify which transactions are relevant to your business. In turn, giving you a clearer understanding of your cash flow and assist in managing expenses. Factors you should consider before you choose a business bank account include:-
Fees: Unlike personal bank accounts, business banking services usually cost money to use. While there are some free options, the majority of business bank accounts will require you to pay a monthly or yearly fee. The amount can vary significantly, but most freelancers can expect to pay around £5/month for a basic account. Having said that, some providers offer a free period when you first open your business bank account. This can be anywhere between 12 and 24 months, so spend time researching what offers currently exist across the market.
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Limits: Some business bank accounts will limit the number of transactions you can make within a set period, while others will have caps on the amounts you can withdraw or receive. This is unlikely to be an issue when you first begin trading, as your income is likely to be lower. However, if you anticipate dealing with high volumes of money, it’s worth choosing a more flexible bank account.
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Card Payments: To make sure your invoices are paid as quickly as possible, it’s in your best interest to choose a bank account that supports card payments as well as bank transfers. Many clients prefer to pay by card due to the added security it affords them. As a new freelancer, it can take a while to build trust. Card payments are processed more quickly than bank transfers and are more efficient
- Currency:Freelancers that work with international clients may need a business bank account that accepts and holds multiple currencies. This can help you to avoid poor exchange rates and transaction fees that often come with sending and receiving money to and from different countries. If this is something that appeals to you, always check with your banking provider to confirm which currencies they support.
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Connected Savings Account: Some freelancers find it helpful to open a business savings account alongside their current account. It not only allows them to keep money aside to use when business is slow but may also offer a more competitive interest rate. Look for providers that offer interconnected current and savings accounts to make transferring money easier.
