How to manage your finances as a freelancer
Working as a freelancer means that you are having to deal with a fluctuating income, which can be one of the pitfalls of this way of working. However, there are numerous other benefits to freelancing, which makes this type of work such an ideal option for so many people.
Managing your finances as a freelancer and doing it efficiently is incredibly important for your freelance business. If you don’t understand or don’t have a handle on your finances, you won’t be able to succeed in your freelance business journey.
Being a freelancer means that you are completely independent and you are responsible for all aspects of the business. This means that you will have to do things like pay taxes on your income, which you wouldn’t have had to worry about if you were an employee. Here is how to be prepared and effectively manage your finances as a freelancer.
Create a budget
You need to create a budget for your business as this will allow you to see your income and expenditure on a monthly basis. You can use your data and information from previous years to predict this when you are forecasting. Your budget won’t be 100% accurate, however, it is essential to have a rough idea of the figures as it can enable you to be on top of your finances. If you are new to freelancing and don’t have stats from previous years, then make rough estimations or carry out some research to get an idea.
You will need to record all of your monthly expenses in a spreadsheet which allows you to see the money going out. Although your expenses will vary, there will be fixed costs which can include rent for an office or putting aside a portion of your earnings for tax. The variable costs can then include paying for supplies or materials, these costs will change and fluctuate over time. There are also one time spends to consider, for example, if you are a freelance illustrator you might need to buy a new software for your work.
Your income as a freelancer will vary over time. However, if you have data from the previous years, then look at any trends that form showing your periods of high income and low income. For example, you may be busy over the seasonal period and quiet during term time. Take this into consideration, this will give you an indicator of when you need to save up for the low tides of freelancing.
By working out your expenses and making educational estimates for income, you will have a good idea of your cash flow. A good cash flow is essential for any business to survive, therefore having an idea of your estimated cash flow is a good idea.
Your budget will change over time, so you need to update it on a regular basis in order to have data that is as accurate as possible.
Know your taxes
When you embark on your freelancer journey, you will need to learn which taxes affect you. It’s vital that you are aware of the taxes you need to pay to avoid paying hefty fines by HMRC. A recommended rule of setting your rates as a freelancer is to charge at least a third more than you would make as an employee. This is to ensure funds to cover your tax bill. You should put a sum away on a monthly basis to cover your taxes, rather than having to fork out one large sum when it comes to paying up. It’s recommended that you open a separate account, which you can deposit your money to pay your tax bill. This will ensure that you have the money to pay the taxes when the deadlines approach.
The self-assessment deadline is 31st January every year, therefore you will need to have completed that to pay your taxes.
Have separate accounts
It would be a good idea for you to keep your personal and business accounts separate. If you are running your business as a sole trader you don’t have to have a separate account legally. Although it’s not a legal requirement to have a separate business account, it is still recommended. Having a business account will help you keep your finances separate and organised. It will also mean that you won’t get confused and it will be easier when it comes to paying taxes and claiming expenses.
Some banks may offer you a fee-free account for the first 12-24 months, therefore its worth shopping around to see the best fit for you. If you have an accountant, you might want to ask their advice to see if they can point you in the right direction.
If you struggle to look after your business finances and are able to then you should look at hiring an accountant. An accountant can be a great addition to your business, and if you feel you will struggle and might make mistakes with your accounts, then it’s advised to hire the services of an accountant. If you make errors when calculating your taxes, you could face fines from HMRC.
An accountant can offer various different services. For example you could hire an accountant just for the things you need them to do as you go along, or you could opt to have an accountant do your business finances all year round.
You should always have money saved as a back up when it comes to freelancing. There will be periods when work is consistent and your income is great. However, you need to be prepared for low times, when work might be difficult to secure. Additionally, you need to have other incomes to support you if you are sick or decide to take leave.
As a general rule, freelancers should have enough money aside or should work towards putting at least a couple months of expenses aside. If you are unable to work, your expenses both personal and business will still need to be paid. So, it’s incredibly important that you are prepared.