Financial planning for freelancers, part 1.
Financial planning for freelancers, part 1.
Freedom is a well-maintained spreadsheet.
Do not let the glamourous digital nomad influencer types fool you. If you want to become a freelancer and work for yourself, the best thing you can do, right now, is to make a financial plan.
Do not book that ticket to the beach, do not set up that LLC, and do not quit your day job until you have gotten very comfortable with your numbers.
Financial planning is key to staying self-employed, but because it isn’t as fun (and even sometimes scary), it’s neglected.
Now, I can’t promise it’ll be fun, but I can say it helps avoid most of the “wow, did I make a terrible decision in deciding to do this” days.
Passion gives you the courage to launch your business. Planning is what keeps your business going.
Remember: We’ve lived through this experience but we are not brokers, accountants, lawyers, financial advisors or specially trained or registered in the financial field. Do your own research and/or hire the experts.
The place to start with financial planning for your freelancer business is a budget. This budget should determine your rates, your ideal number of clients, everything. It is key to making sustainable decisions.
Paid subscribers: we're putting the finishing touches on a Nice Work Google Sheets Basic Budget just for you. Keep an eye out in the upcoming weeks for its release! In the meantime, there are plenty of free downloadable templates out there if you don’t want to start from scratch.
To build a budget that works for your planning, you will need to know your OPEX and CAPEX.
As a shortcut, CAPEX is usually your one-time expense (like a laptop), whereas your OPEX (operating expense) is usually something charged regularly. This doesn’t always hold true though, so here are some examples:
CAPEX: Larger purchases, such as computers, fall under this category.
Computers & other electronic devices
Furniture for the above
Tools, transport or any other items you need to do your job
OPEX: Often paid monthly, but annual subscriptions can save you money so worth considering these include. Ad-hoc costs should also be added here.
Mobile phone & internet costs
Software subscriptions
Co-working subscription
Insurance
Stationary & Office Supplies
Utilities
The easiest way to make your budget is to split your costs into two categories: What can you pay for once and forget (until you need it again), and what do you need to remember to pay for regularly?
Once you have your list and have it categorised, the next step is to turn it into a number you can use - namely, what does it cost you to be a freelancer, and how much money do you need to have coming in every month to make it feasible?
Add together:
All of the “one-time” expensive costs (CAPEX)
The costs of running your business monthly (either as the annual amount, or the monthly amount x 12 months)
Any other “ad-hoc” costs you might expect, like paying someone to check your books. If you want to save yourself some grief, note down when you’d need to pay for this so you can predict it.
The cost of your sanity. This is a new one, but worth including: What amount of money do you want to have in the bank in case of emergency/as your rainy day fund?
Altogether, that’s your budget. That’s your cost of doing business. If you divide it by 12, that’s roughly what you need to bring in each month to break even (and that’s before you pay yourself).
Next, take a look at the time these need to be paid. An easy mistake to make is to rely on the “total divided by 12” number, but bills come at different times. Be sure you know what months you will need more in the bank vs. less. This is expense forecasting and it helps you set aside/not use the profit you think you have before you need it.
There’s only more you can add to this budget, but something else to consider as you think about your costs of running a business:
Do you need to charge/collect sales tax, or VAT? Does it cost you to do this, and should you include it in your rates or add it on top?
Do you want any help, even from another freelancer? You may have to pay them before the client pays you, so make sure you think about how long you take to get paid vs. what timeline you’ll agree to pay someone else.
What can you buy that gives you more TIME to earn money? When you start freelancing, not all of your time is billable. So how can you lessen your admin, and how can you take that cost and make it work in your budget?
With all of this info, you can start to think about how to calculate your rate. We covered this in a previous edition, which you can read here:
TL;DR You’ll save yourself a lot of headache if you create your rates from a place of knowing your costs (instead of creating it from what you think your salary would be).
Where the digital nomads get it right is: Sometimes, business just booms. Numbers look good, your bank balance is full, you’re thinking “this is easy!” And when you feel that way: Remember that everything comes in seasons. Build up a rainy day fund. Keep track of your costs. Stay on top of when your biggest bills are due. Set reminders if your clients aren’t paying invoices on time.
On the other side of business freedom is a well-maintained spreadsheet. Trust me on this one. - Peter