Three financial management tips for busy freelancers
You don’t need to study financial management to be able to run a profitable freelance business. All you need is an effective system and the right approach.
1. Separate your accounts
It’s obvious that as a freelancer you need to keep your business and private accounts separate. However, many freelancers fail to manage their business finances efficiently and end up struggling to pay their taxes at the end of the year or are surprised that their profit isn’t high enough. How to avoid this trap?
In his book “Profit First” Mike Michalowicz recommends creating five different accounts for your business to be able to focus on profit:
1) Income account that serves as the main account
2) Profit account where you transfer 1% to 17% (depending on the company size) of your incoming transactions to eventually create a profit
3) Tax account where you save to pay your taxes (about 15%)
4) Owner compensation account for your salary as a business owner (the author suggests to set it at about 50% for businesses generating up to 250.000 USD per year)
5) Expanses account for the costs of running your business (30% to 65% depending on your business)
In this way you’ll make sure there’s always enough money in your business to cover so many different areas. However, you don’t need to go that far and create multiple accounts to be able to manage your money effectively. The least you can do is to create a business saving account for your taxes and financial cushion. It will help you get more clarity about how much money your business actually has and how much you can invest in your growth, marketing, tools, professional development etc.
No matter how many accounts you decide to open for your business and how you allocate your funds, the key to success is to keep your expenses on as low a level as possible.
2. Build the right money mindset
Many problems that freelancers and business owners face are related to their approach to money. Income has been a taboo subject for many generations and you might feel uncomfortable or guilty when talking about money. Even if you run your own business. That’s why overcoming your fears, inhibitions or misconceptions might be crucial if you want to handle your finances in a more effective way.
In her excellent book “Fearless Money Mindset” Arian Simone describes precisely how to do it. She’d gone bankrupt and lived in her car for some time before she became a successful entrepreneur, so she definitely knows what she talks about. She suggests to follow seven principles to get rid of the fear related to financial issues:
1) Have strong beliefs (The Belief Principle)
2) Change the way you think (The Thought Principle)
3) Align the way you speak to your thoughts and beliefs (The Speech Principle)
4) Keep giving, sharing and supporting (The Principle of Sowing)
5) Keep acting on your plans and ideas (The Action Principle)
6) Nurture your relationships and bring value to people (The Relationship Principle)
7) Manage your money effectively (The Principle of Stewardship)
The author explains also that following her principles in this exact order can help you not only to built the right money mindset, but also to live at your maximum potential. Plus, her experience and stories she shares are so inspiring that it’s impossible that this book won’t change your ideas and behaviour!
3. Use apps
If you struggle with discipline when it comes to finances or if traditional money education in form of courses didn’t bear fruit, lean on technology. There are many great apps that will help you manage your money, for example:
1) Mint to create budgets, track your expenses or pay your bills
2) Ramsey to plan expenses, create budgets or plan your savings
3) Expensify for thorough expense management, tracking receipts, sending invoices or collecting payments
If you use the apps diligently, recording all your expenses and profits, you’ll be able to gain a quick overview of your financial situation. Plus, you’ll know exactly how your budget can be improved, for example by cutting down on marketing or administrative costs (such as rent of office supplies).
Successful money management is not something you can learn overnight. But with the right tools, books or systems you can find out how to take your business finances to the next level.
Over to you
How did you learn to manage your finances as a freelancer? What books helped you on this journey?