Let's face it, as rewarding as it can be, freelancing isn't easy. That said, one of the most challenging parts of being self-employed — aside from there not being enough hours in the day — is managing your freelance finances.
With so many incomings and outgoings, keeping a handle on your freelance earnings can prove bewildering at best — but there are ways you can track your funds with minimal stress.
First and foremost, you need to get into the right groove. What does that mean, you say? Essentially, by getting your financial framework in order, you'll be able achieve a smooth flow, making your financial management process a seamless part of your daily professional duties.
But how do I do that, you say? Never fear because we’re going to tell you right now.
Allocate an account for tax savings
When it comes to keeping track of your freelance finances, separating your personal and professional affairs is essential.
Even if you don't wish to opt for a dedicated business account, you should still run at least three linked bank accounts (preferably from the same banking institution) alongside each other: a personal account, a business funds account, and most importantly, a tax storage account.
To ensure your finances flow smoothly, you need clarity — and separating different streams of income and expenditure will help you do just that. By setting up a dedicated tax storage account, not only will you be able to see what you have in the tax kitty at a glance, but it will serve as a reminder that you need to save for your annual bill. Despite death and taxes being the only certainties in life, you'd be surprised at just how many freelancers fail to prepare for their annual return — don't be one of them.
Understand how your freelance finances are taxed
A brief but hugely important point: to ensure you deduct and store an ample amount of your income to put toward your annual tax bill, you will need to understand it.
For instance, in the UK, self-employed taxpayers are required to stump up a “payment on account” or advance payment based on their previous tax bill in addition to their “balancing payment,” or income-based bill for the current tax year. Not knowing this information in advance has caught out many a freelancer, leaving them in financial hot water.
Trickle your earnings from regular clients
As a freelancer, you'll understand the importance of your bread-and-butter clients (or regulars) to your freelance finances.
Having a regular roster of clients is essential as it will ensure you maintain a steady, guaranteed cash flow, allowing you the elbow room to develop your skills and prospect for new projects.
Not only this, but your regular clients also offer you the opportunity to weave a financial safety net.
To do this, note down all of your regular clients and the amount of income they generate each month, then add them together. Next, deduct 20 percent from that overall figure to put away in your dedicated tax savings account.
Finally, note down an additional amount you can afford to deduct from the remaining total and put that in your business funds account (noting down the amount and updating it on a monthly basis) as a rainy day fund.
Should you lose a client suddenly or incur an unexpected expense, this extra element of cash flow — or safety net — will prove priceless.
Keep watertight records of your freelance finances
First of all, make sure all of your invoices are coded in a clear and logical fashion. For example, for tax year 2017/18, you could use the code: 201718: 00001, 201718: 00002, etc. By doing this, you’ll ensure your financial records are quick and easy to track.
Secondly, to track your freelance finances effectively, you will need to create a document for your income and expenditure and update it regularly. Creating a spreadsheet is simple, and it works.
If you'd prefer to keep track of your records in a more contemporary fashion, there are a host of intuitive accountancy platforms and apps on the market:
- QuickBooks: A comprehensive small business accountancy platform by Intuit, QuickBooks allows you to maintain your records, invoice clients, and predict your tax bill all in one place.
- Goodbudget: This nifty little platform is easy to learn, and it's particularly effective if you'd like to analyze and track your expenditure in a little more detail.
- Toshl Finance: Available for Android and IOS, this particular app is great for connecting all of your financial accounts and keeping track of your client billing.
And finally, when tax return time comes knocking, you should hire a trustworthy small business or freelance accountant to examine your records and fill out your return. Not only will this save time, but it will also ensure your bill is accurate.
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Tracking your freelance finances is an ongoing pursuit that requires constant care and attention, but once you get your affairs in order and weave it into your everyday work responsibilities, you'll soon find it's simpler than you first thought. Good luck!