(Art credit: Karen Fischer, "Viva")
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Working as a freelancer or independent contractor is like riding a roller coaster. One month you’re flush with cash and the next you’re wondering how you’ll pay the bills. Sometimes you wish you still received a regular paycheck.
How can you smooth out some of the financial bumps in the self-employment road?
Here are five ways to manage your finances as a freelancer.
1. Create a budget
The most basic — yet critical — task of managing your finances is to understand your income and expenses. You can use software or an ordinary spreadsheet to help.
List all your regular monthly recurring expenses, such as:
- Rent for a co-working space
- Publication subscriptions
- Web hosting fees
- Post office box
- Cell phone bill
- Contributions to retirement accounts
- Health insurance
List the expenses you incur irregularly, like:
- Business license fees
- Registered agent fees
- Income and self-employment taxes (quarterly)
- Travel and entertainment
- Business cards and office supplies
- Software and hardware
Create a monthly budget by starting with the recurring expenses. Categorize these costs and add them to your software accounting program or spreadsheet expense tracker. Next, take the totals of the irregular expenses, divide by twelve, and add the result to each month.
The end result is how much you need to set aside to cover your average monthly business costs.
After you’ve calculated your expenses, estimate your gross income for the year. Start by using last year’s figures and adjust for any changes you anticipate this year. Divide by twelve and record the amount on your budget spreadsheet as your monthly income.
As your income rolls in, the temptation is to spend it. However, you should reserve enough cash to pay several months’ expenses, particularly when a large bill is looming.
2. Anticipate your taxes as a freelancer
Taxes are often your biggest expense. And as a freelancer, it’s likely you make estimated quarterly tax payments to cover your share. These payments are due in the middle of April, June, September and January each year. Make sure you set aside enough cash each month to pay your taxes on time.
Although you don’t want to pay any of your bills late, paying your income and self-employment taxes on time is critical. If your payments are overdue, the Internal Revenue Service (IRS) could charge you underpayment or late payment penalties.
Additionally, don’t delay paying your quarterly taxes just because you think you’ll get a big refund when you file your annual return. The IRS expects you to pay taxes on income as you receive it.
3. Get better payment terms
When you work for yourself, your number one goal is to get paid by clients as quickly as possible.
Standard payment terms are net 30 days, which means the client has 30 days to pay you in full after receiving your product or service. However, as the business owner, you have the right to adjust your payment terms as you see fit.
Try asking your clients to pay in fifteen days instead of the standard 30. If they agree, include those terms in your contract. This change should help your cash flow if they comply.
Depending on the type of work you do, you might ask for a deposit in advance. For example, an event coordinator doesn’t want to get stuck working for free for months. If your client pays in advance, they might be more motivated to get the job finished and consequently pay you the remaining balance.
Your contract should also include late fees for clients who don’t pay in a timely manner. They might make more of an effort to process your payment on time if they have to pay more.
4. Raise your rates
It’s inevitable that over time your business expenses will increase. If your income remains static, those increased costs will push your finances backwards. And that’s when it’s time to raise your rates for new clients.
If you’re performing well, ask your regular clients for periodic rate increases.
Make sure you can substantiate your request. A client is less likely to approve a rate increase if you can’t show how you’re adding value for them.
For any new clients, adjust your starting rate to meet your needs and make sure it’s crystal clear what services they’ll receive for their money.
5. Reduce your expenses
As a freelancer, you should never stop examining your budget to see where you can cut costs. This is a smart exercise no matter what level of success your business is at.
Perhaps you can find a cheaper co-working space, or switch to using a coffee shop or library for free. You could also barter with other freelancers. For example, offer to edit a web designer’s promotional copy in return for a reduced rate for design work.
Use do-it-yourself (DIY) tax preparation software like TaxAct to file your annual tax return rather than trying to calculate it manually. The software might catch some deductions you missed, or it might keep you from making a costly error. Plus, online DIY tax programs are often more economical than going to a professional.
You might not need to overly obsess about your business finances. But, it’s always imperative to balance your accounts each month to ensure you’re on track with your income and expenses.
It can be a bit nerve wracking to manage your finances as a freelancer – especially when you first start out. However, with a bit of effort and creativity, you can even out your cash flow and eliminate unnecessary expenses. Ultimately those decisions can help you reduce your financial stress and have more time to concentrate on your flourishing business.