A lot of freelancers are great at what they do but not so great managing money. Here are 12 tips for achieving financial success with your freelance business.
One of the best statements I have ever heard about business and money is that “Money isn’t the most important thing, but it touches everything that is.”
What it means is that money makes the world go ‘round. If you want to start a freelance business, you need money for software, equipment, and supplies. If you want to grow your business, you need money for sales and marketing. If you want to give back to your community, you need money to donate. If you are a freelancer, you need to make money to pay your bills and if you’re an agency, you need money to pay your overhead, pay your team, and reinvest back into the business.
Money is a necessary part of doing business and the reason we all work in the first place, but money is also where many freelancers run into trouble.
Below I’m sharing 12 tips to help you achieve financial success with your freelance business:
1. Get Separate Bank Accounts
Do not mix your personal and professional finances.
Get a separate checking account and savings account set up for your business. This will make your bookkeeping, taxes, and legal compliance much easier.
2. Use Specific Bank Accounts
Consider opening additional bank accounts for specific expenses and setting up automatic transfers from your main checking account to these specific savings accounts. This approach allows you to automate the saving of fund for things like your 401K contributions, estimated tax payments, business license renewals, business travel, and health care.
Here’s an example of how this works:
If your budget for business travel and conference attendance is $6,000 per year, you could set up an automatic transfer of $500/month from your business checking account to your business travel savings account. Then when evaluating whether you can attend an event or not, you can check that bank account to see if you have the funds. If you have the funds, go to the event. If you don’t, you skip it.
3. Consider Forming A Business Entity
Sole proprietors have some of the highest tax rates in the country. Consider forming a business entity that has a more favorable tax structure and consult with a legal professional on the best entity for your situation.
For example, my agency Bourn Creative is a pass-through entity. We’re an LLC taxed as an S-Corporation. The annual fees associated with maintaining the LLC and the additional tax preparation that is required are far less than the amount we save in taxes because of this corporate structure.
Also, establishing the LLC separates all of our personal assets from the business assets. The company has no assets other the cash in the bank a few computers, some video equipment, and a printer. All of our client contracts are between the client and the LCC, which means that if anything ever went south and the client decided to sue us, all of our personal assets are protected.
4. Invest In Online Bookkeeping Software
Invest in online bookkeeping software like Quickbooks Online. I use and recommend Quickbooks because it’s well known and understood by a huge number of accountants and bookkeepers and because it makes our financial lives easier.
With Quickbooks Online, you can:
- Connect the software to your bank accounts so your invoices and payments are automatically reconciled
- Track invoices and see if a client opened it
- Invoice clients and accept credit card payments or bank transfers, including recurring payments
- Customize the payment type per invoice and per client
- Provide your CPA login credentials during tax season so they can get everything they need without you having to do tons of work
- Easy to understand reporting and customizable reporting
- No software to update or no new software to purchase
5. Hire An Amazing CPA
Do yourself a favor and skip the DIY everything mentality that most freelancers and agency owners have and invest in a fantastic CPA.
A good CPA will ensure you pay all legally required taxes but not a single penny more than you absolutely have to. With an understanding of the ever-changing tax laws, loopholes, and potential write-offs, a CPA will help you keep more of the money you make by enacting as many legal tax strategies as possible — many you would never know about if you tried to do your taxes yourself. A really good CPA will also provide consulting services throughout the year, including mid-year check-ups and future business planning and investment planning.
A business accountant will always know more than you about managing the financials of your company. An accountant can also give you an analysis of the financial health of your business, reviewing things like sales reports, balance sheets, and profit and loss statements so they can help you make needed course corrections and show you where you make improvements.
The bottom line is that if you want to pay more taxes, do it yourself, but if you want to keep more of the money you make hire a professional.
6. Keep Three Months Of Operating Expenses In The Bank
Make it a point to keep at least three months of operating expenses in the bank at all times. With this savings approach, you’ll experience less financial worry and stress over managing cash flow and because you’ll be well-prepared for unexpected expenses like a sudden computer failure.
Keeping cash on hand will also help you:
- Bridge the gap if a client delays their payment or you lose a retainer client
- You need to hire someone or pay a vendor or contractor in advance
- Say yes to a new business opportunity
7. Max Out Your 401k Contributions
When it comes to taxes, you’re going to have to pay someone. The question is, do you want to pay yourself and put more money in your own pockets, or do you want to kiss your hard-earned money goodbye and give all the money to the government?
To keep more of your money, it is critical that you put as much as can into your pre-tax 401K savings to reduce your overall tax liability.
While maxing out your 401K contribution is always the best choice, starting with some savings is better than not making a contribution at all. If you’re unable to max out your 401K contribution take baby steps and:
- Get started with a saving amount that you’re comfortable with
- Divide it by 12 or the number of paychecks you receive each year
- Set up an automatic monthly deposit for that amount
- In six months, increase the amount by $25
- Six months after that increased it by another $25
- In six more months, increase it another $25
- Continue doing that until you’re maxing out your contribution
8. Business Expenses Are Not Free Money
It is never wise to spend a dollar now because you’ll save 20 cents on taxes — because you still spent a dollar.
Calling something a business expense or a write-off doesn’t make it free money you can spend without consequence. To remain cash flow positive, it is just as important to manage your expenses and spending as it is to make more sales and bring in more money.
9. Seek Ongoing, Long-Term Work
While one-off website projects are great for providing an influx of cash and larger lump sum payments, it can be difficult and exhausting to constantly be forced to make new sale after new sale to stay afloat. Likewise, relying on a consistent stream of new clients is often a ticket aboard the feast or famine roller coaster.
Consider seeking out ongoing monthly website support and maintenance work as well as long-term retain engagements with clients who purchase a block of hours each month and sign six-month or even year-long contracts.
At Bourn Creative, we have several long-term retainer clients who have a dedicated block of hours every month for engineering and development work. We also have ongoing website support and maintenance clients and long-term retainers for graphic design work. The monthly billing from these clients provides a stable, reliable income base that we can count on when strategizing and planning for the future.
10. Use A Rewards Card Whenever Possible
Rewards credit cards can deliver huge benefits, but you have to be smart about how you use them. First, it is imperative that you never carry a balance from month to month because the interest rates on rewards cards will basically wipe out any point or rewards you may earn. Second, pick one rewards card that you are actually going to use an stick with it. If you spread your purchases across too multiple rewards cards, your spend amount won’t be enough on each to make it worth it.
Here’s how we use rewards cards so they work in our favor:
- We hold one primary rewards credit card for Southwest Airlines and maintain a Hilton Honors rewards account as well.
- We pay every possible business expense with the Southwest Card, including our health insurance.
- The rewards are tied to our Southwest Rapid Rewards accounts, so while our business expenses earn the points, we redeem the points for personal travel.
Fun Fact: This Thanksgiving, our family of four is going on a nine-day vacation that includes two flights, a rental car, and three hotels — and the flights, hotels, and rental car are all free — paid for with rewards points earned through the payment of business expenses.
Also, when possible, take advantage of 0% financing through vendors and use someone else’s money to finance your large purchases. For example, when my iMac suddenly died earlier this year, I replaced it with a new iMac Pro, but didn’t have $5,000 sitting around that I wanted to give to Apple.
I took advantage of a special promotion Apple was running that offered 0% financing for 18 months. This way we’re paying much smaller automated payments each month and at the end of 18 months, it will be paid off and I used their money to make it happen.
11. If You Don’t Know Your Numbers Get Help
As a business owner, you need to not only know, but fully understand your numbers like gross sales, expenses, monthly cash flow, and debt service.
If you don’t know how to find those numbers or don’t understand their impact and what they mean, it’s time to get help from a financial professional. Hire a bookkeeper, get an accountant, or find someone to provide the training you need.
12. Everything Is Negotiable
While it won’t typically work for retail accounts, if you can speak to a real person about your business account, you can usually negotiate down your pricing to save money.
Here are two examples where this strategy has worked for me:
- We had a marketing automation software subscription that was $300/month, but when attending an event, we saw the company was running a sale for $250/month. We contacted a sales rep after the event and got our rate dropped to the new sale price.
- Our phone and internet bill was higher than we’d like it to be, so we called the provider, talked to a customer service agent, and asked, “What can you do for us?” In one simple conversation, we dropped our bill significantly and actually got a better service package with improved internet speeds.
Take Baby Steps For Long-Term Enjoy Financial Success
Hopefully, you learned a few new tips to help solidify the financial foundation of your freelance business.
If you read through this list and felt a little overwhelmed, that’s okay! Every business owner takes these steps in their business over time (sometimes over several years) and not all at once, so take baby steps. Choose one thing to implement and get it done, then choose another, and keep going until you have implemented everything.