One of the challenges that go along with working as a freelancer is having to deal with an unpredictable income, which is one of the potential drawbacks of this form of employment. Freelancing, on the other hand, has a lot of other benefits that make it a good choice for many people.
As a freelancer, the success of your business depends on how well you handle your personal finances and make sure that your business stays profitable. If you don’t have a grasp of your finances, you could find yourself in a lot of trouble.
When you work as a freelancer, you are fully on your own and responsible for managing every part of your business. This implies that you will be responsible for things such as paying taxes on your income, which would not have been a concern for you if you had been working for someone else as an employee. Here’s how to manage your money well as a freelancer by being prepared and making plans ahead of time.
Create a budget
You need to make a budget because doing so will show you on a monthly basis how much money you make and how much money you spend. When you are doing your forecasting, you can make a prediction about this using the data and information you have from previous years. Despite the fact that your budget will not be entirely precise, it is critical to at least have a general concept of the numbers because this can help you stay on top of your finances. If you are new to freelancing and do not have statistics from prior years, you need to either make some educated guesses or conduct some research to obtain an idea of what you may expect.
You will need to use a spreadsheet to keep track of each and every one of your monthly costs so that you can keep track of the amount of money that is leaving your account. There will be some costs that are fixed, such as the rent you pay for an office or the amount of money you set aside to pay taxes on your earnings. These prices will vary depending on the nature of your business. The costs of buying supplies or materials could be considered variable costs because they can change over time. There are also one-time expenditures to think about, such as the possibility that, if you are a freelance illustrator, you will need to invest in some new software in order to do your job.
Your earnings as a freelancer will be subject to fluctuations over time. On the other hand, if you have information about your earnings from previous years, look for patterns that show times of high income followed by times of low income. For instance, maybe you are inundated with work at the beginning of the financial year in April, but hit a slow period after Christmas. Take into consideration the fact that this will provide you with an indication of when you will need to preserve money in order to weather the low tides of freelancing.
You will have a decent picture of your cash flow if you calculate your expenses and make educated projections about the amount of money you will earn. Because a healthy cash flow is necessary for the continued operation of any business it is in your best interest to have a concept of how your expected cash flow will look.
Since it’s likely that your financial situation will change over time, you should update your budget often to make sure it has the most accurate information possible.
Be aware of your tax obligations
You will need to educate yourself on the tax implications of becoming a freelancer before you start working for yourself. If you want to avoid having to pay big fines to HMRC, it is imperative that you are aware of the taxes that you are required to pay. When starting out as a freelancer, it is recommended that you establish your prices such that they are at least a third higher than what you would make working for someone else. This is to ensure that you have the finances to pay your tax bill. Instead of having to pay your taxes all at once in one enormous sum, you might consider setting aside a certain amount of money on a monthly basis to cover the cost. It is strongly suggested that you form a separate account into which you can put the funds that you intend to use to settle your tax liability. When the deadlines for paying your taxes get near, this will ensure that you have the funds necessary to do so.
Because the deadline for self-assessment is the 31st of January of each year, you will need to have completed that in order to be able to pay your taxes.
Keep your personal and business finances separate
Maintaining a wall of separation between your personal finances and your business finances is a smart move to make. There is no legal requirement for you to open a separate bank account for your firm if you are operating it as a sole trader. Even though the law doesn’t require you to have a separate bank account for your business, it is still a good idea. Keeping your personal funds and business finances separate and organised can be easier for you if you have a business account. When it comes to making tax payments and submitting expense claims, you will not have to worry about being confused, and the process will be simpler overall.
You should compare the products and services that different financial institutions offer so that you can find the one that fits your needs best. If you have access to an accountant, you may want to consult with them in order to determine whether or not they are able to steer you in the appropriate direction.
Get professional help
If you have trouble keeping track of your business finances but are still able to do so, you should seriously consider hiring some sort of accountancy services, such as sage cloud accounting support. When determining your taxes, if you make any mistakes when determining your taxes, you could be subject to a penalty from HMRC.
An accountant is capable of providing a wide variety of services. For instance, you might hire an accountant solely for the tasks that you require them to complete as you go along, or you could choose to have an accountant handle the financial aspects of your company throughout the entire year.
Have a financial safety net
When it comes to freelancing, you should never go without having some money put aside as a safety net. There will be times when you have a steady stream of employment and your income is at an all-time high. On the other hand, you should always be prepared for slow periods in which finding work may be difficult or if you become ill.
Freelancers should, as a general rule, either have enough money saved up or strive toward the goal of saving enough money to cover at least two months’ worth of living expenses. Even if you are unable to work, you will still be responsible for paying all of your bills, both personal and business, so being prepared is crucial.