A guide to managing cashflow as a freelancer

Freelance businesses

A guide to managing cashflow as a freelancer

Cashflow management as a freelancer can be a challenge.

The ultimate responsibility for getting paid is yours and yours alone. While a regular payday is the highlight of most employed people’s months, as a freelancer it’s often not a certainty. There are some principles and tools you can employ to make sure you have enough money at any given time to meet all your expenses.

You are a business

As your core endeavour as a freelancer is delighting clients, often in creative ways and often in a chosen passion, it can be difficult to develop a commercial mindset. A freelancer is as much a business as the local tradesman or shopkeeper though. If you’re planning to make a living from your own output, effective accounting and financial management are a core part of your operation. Keep personal and business finances separate and take the time to develop some key financial strategies.

Agree payment terms

All of your customers should be aware of your payment terms from the get-go. It may be that you work to your client’s cycles but so long as they work for you, then both parties know in advance the dates and frequencies they’re working to. With payment terms in place and understood, you can plan all other financial aspects around them.

Budgeting, income and expenses

Creating a budget is a fundamental necessity for freelancers but it’s not always easy if uncertainty is a feature of your activity. Start by assuming that some expenses will be the same every month. That makes projecting how much money you will need to cover them easier to forecast. Record income as you receive it (cash basis) or as impending payments (accrual). Remember that some expenses will be tax-deductible so make sure you keep accurate records and all receipts. Then you’ll be fully prepared for the annual tax paperwork.

Keep some money back for tax

With that in mind, there’s no way of avoiding tax – at least not legally. Set aside a percentage (at least 25%) of your profits for tax while understanding what ‘profit’ looks like to you as a business. That way there’s no drama at the end of the year.

Plan for peaks and troughs

As a freelancer, your income is likely to go up and down even with an established client base. Lean periods are inevitable so put some money away for quieter times. Once you’re fully established working to a three-month rule is a good idea. That is, having three months’ worth of bills covered by savings. Auditing your cash flow and budget regularly will help you identify trends.

Use all the resources at your disposal

Using accounting templates and tools, some free and some paid, will help enormously. Platforms such as Xero, QuickBooks and FreeAgent are easy to use and not too expensive.

Freelancers often manage their accounts and tax affairs capably. However, if you’ve reached a point where you need professional help, SQK Accountancy are experts in offering advice and guidance to small businesses, sole traders and freelancers in Manchester and beyond. Get in touch for a friendly chat to find out more.

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