What
Before you start freelancing, you’ll need to fully understand your financial position.
This means creating a personal budget, a business budget, and setting some financial baselines.
You’ll have already completed the task on (/task/understand-affordability/)[understanding affordability], but now you need to go a little further - to dive into what you might need to be making every month, and what protections you have in place should things go wrong, or for quieter months.
Why
Getting a strong handle on your personal and professional finances is going to be essential to managing your freelancing business.
Without knowing what you need to be bringing in each month or over the course of a year - it’s hard to know if you’re on track, falling behind, or doing brilliantly.
Many freelancers feel they’re “not doing okay financially”, but without having any real metrics in place to track that, i.e. they don’t know what they need to be bringing in every month, or don’t realise they might have had a great January, which allows them to have a poorer February.
In the UK we’re especially bad at conversations around money - but remembering that a) only you are responsible for your personal financial wellbeing and b) you’re running a business which requires some mature decision making around money - hopefully reminds us that we need to be on top of our finances.
Financial health and mental health also go hand in hand, and the more we worry about finances, the less able we are do deliver great work - causing a downward spiral.
So at this stage in your freelancing career - ensure you’re putting good foundations in place.
How
1/ Organising your personal budget
You’ll need to spend some time understanding your own finances: how much are you spending each month, what is essential spending, what is discretionary / fun spending, and how much do you need to be making every month (after tax!), what do you have in savings for a rainy day or if things go bad.
If you haven’t already done this - or its been more than 12 months since you did this exercise, it’s essential you create a personal budget as soon as possible - so you’re absolutely clear on how healthy your finances and emergency funds are.
2/ Developing a professional budget
How much are you aiming to be making each month in terms of client billings? What are your estimated costs for running your business, i.e. subscriptions, hardware, office costs, travel, materials? What will you be left with after tax deductions, putting money away for a pension, savings or emergency funds?
It’s entirely possible you don’t know what taxes you’ll need be paying, the best way of taking money from your business, or what costs you have at this stage - so this is the time to start researching and figuring out the gaps in your knowledge. You can use estimates at this stage, and refine them after six months of trading.
3/ Defining some warning signals and baselines
Setting some warning signals and baselines for yourself, i.e. how long can you run your business without income, how many months of below target income will you run before you change approach, what signals do you want to set for yourself to say “something needs to change?”.
It’s not all doom and gloom either - you can also set some headlines, i.e. if your business is doing well, and over-delivering financially, what will you do with those funds?
It can be helpful to write these signals and baselines up, and include them in a regular review meeting you have every month or three months, when you’re looking at the performance of your business.
Completing this task
This task can take some time, and be quite emotionally draining, so don’t aim to do all of this at once.
Try to block at least 30-45 minutes a week on this task, break it up into smaller chunks, and just try and make some progress, rather than avoiding it all together.
You might need to get input from others too, i.e. perhaps you have a partner, perhaps you have a financial advisor or mortgage broker, or even an accountant.
Once you’ve completed the task, make sure you keep your budgeting and warning signals documents somewhere handy for regular reference.
