When we think of being a freelancer, often our mind goes to unstable income, unusual working hours and a complete inability to craft a budget. This might be true for beginners who are just getting started. For more experienced freelancers, budgeting is an essential part of the career. Budgeting is crucial when it comes to not only managing your household financing but also growing your business. Without a budget, your business will be stagnant and you will most likely be living paycheck to paycheck. Budgeting can be tricky to wrap your head around. Being a freelancer means you might make $500 one month and then $10,000 another month. How could possibly make a sustainable budget without knowing how much you will make month to month? Let’s find out.
Separate business and personal accounts
Your first step is to separate your business and personal accounts. Not everyone does this. It seems like it would make sense to get paid straight into your bank account since you are a sole trader anyway. This is a terrible way to go if you want to grow your business. Separating your business account allows you to get a better understanding of what income you will be using for your business and what you will be paying for yourself.
Separating your accounts can be as simple as opening a second account under your name at your bank. You can also use software such as PayPal or Transferwise if you want to keep it entirely separate to avoid withdrawing when you need funds in your personal account. Remember we want to be tracking everything, having some separation gives you a little more discipline when managing your finances.
Use a CRM
What does a CRM have to do with budgeting? A CRM allows you to get a good overview of each of your clients. This helps you understand how much money you are earning from your clients, what invoices still need to be paid and roughly how much you are making each month. It is a good first step towards creating some stability in your income. It is unlikely you will be bringing in the same amount every month but using a CRM will give you an overall picture of your clients and what each project is worth.
Pay Yourself a Salary
Once you have completed the above steps, it’s time to start budgeting. Pay yourself a set salary. This should be the same each month. If you are worried you won’t have enough to withdraw each month, keep it low until you grow your business enough that you can have a predictable amount to withdraw. For example, if you want to pay yourself $3,000 a month make sure your business is bringing in an average of $5,000 a month. Some months you might only bring in $1,000 but the goal here to have enough in the business account that you can still withdraw that $3,000 to keep your salary the same.
You might need to adjust this figure a few times to get it right. The goal here is to be consistent so try not to aim too high until you have achieved revenue well over that amount and have a safety net built up in your business account.
Allocate business expenses
Now with the leftover money, you need to create a separate budget for your business. You might want to do this before you set your salary so you can continue growing your business. If you are withdrawing too much salary, your business will suffer. Not having enough money to grow will make it difficult to hit milestones such as advertising budgets, hiring other freelancers and investing in new tools and software.
Set a figure that you will use to put back into your business. If your revenues are average around $5,000 a month, set yourself aside $1,000 for your business budget. This will leave that extra $1,000 (after your $3,000 salary) to act as a buffer for future expenses and salary for those leaner months. You will also need to set aside some money for your taxes.
Create a financial plan
The final step is to create a financial plan to guide you month after month. Your financial plan involves all the milestones and goals you want to hit as you grow your business. This includes revenue goals, salary goals and business investments. Your financial plan should be a long term strategic approach. Set yourself sometime each month to review your financial plan and make adjustments based on how your business is performing. This will help give you an overview of what is working and what needs to be changed. For example, you can check if you are withdrawing too much salary, if you're spending too little on marketing or if you need to bring in more revenue by bringing on some new clients.