10 Smart Ways to Manage Your Freelance Finances

A freelancer’s flexible schedule to do the work they choose, when they want and where they want sounds appealing to many. After all, who doesn’t want to get paid for doing something they love? But it isn’t always easy. The pressure of finding work, waiting to get paid and administration can be too much for some, sending them running back to a 9 till 5.

Being in control of your freelance business is essential for success and avoid quitting your ‘dream job’ and going back to full time employment. That includes actively organising invoices, income and expenses and taxes. This can often be difficult when there are a range of short term contracts as it only increases the amount of paperwork you have to juggle!

Whether you’re an established freelancer, just starting out or wanting to expand your side-hustle, the last thing you want is to get bogged down in the money and budgeting side of things. To help you avoid that, I’ve put together 10 tips to help you manage your freelance finances.

1. Choose your business structure

Deciding on the type of business structure is an important factor to consider when it comes to the running of your UK freelance business. This is particularly relevant when it comes to how much tax you’ll pay. For example, if you register with HMRC as a sole trader, it means that both you and your business are one of the same. In contrast, you may be a limited company whereby it is a separate legal business.

Although most freelancers work as sole traders, have a careful look at all the pros and cons before making a decision. Still confused about what to do? Read this guide Sole Trader or Limited Company? What’s Right?

2. Understand your taxes

Whichever business structure you choose, you are liable to pay your own taxes. This is unlike paying taxes from a traditional job whereby it is done for you. Although this is a daunting prospect for first-time freelancers, being organised will help to eliminate any worries later down the line. The responsibility of paying taxes on time is solely down to you so be aware of the UK tax dates.

Many freelancers make the mistake of not including taxes into their monthly earnings and are hit by a large tax bill at the end of the year. As a result, you could land with unnecessary debts from not managing your freelance business finances wisely. When it comes to pricing remember to “charge your worth and then add tax”. Not sure how to work that out? Then take steal my hourly rate calculator to check your getting covering your expenses & tax each time you send out a quote.

3. Keep separate bank accounts

One important way to stay on top of paying your tax and other bills is to open up a separate business bank account. In doing this, it will be easier to see how much money is going in and out of your business. Keeping a business account separate from your personal account will also help you keep track of both your income and expenses. It also means that you can set a realistic salary. After all, they do say not to mix business with pleasure!

Many business accounts, such as Starling, offer great perks and you’ll more likely be eligible for small business funding programs.

4. Manage your budget

While this may sound like obvious advice, poor budgeting skills is one of the reasons small businesses don’t succeed. On the whole, freelancers don’t have a steady income: money might be sky high one month and receive a trickle the next. Therefore, you need to know how much you’re spending each month by creating budget, and sticking to it!

Factoring in all your payments for things like travel costs, rent, insurance or equipment costs is critical to managing your cash flow. As is making sure your expenses don’t exceed the amount you’re actually getting paid. It’s also very useful to know what business expenses you can claim back for, such as food and drink so you can decide whether it’s really worth the spend.

5. Keep your paperwork

Organising your receipts, invoices and other essential paperwork is absolutely necessary to ensure they can be referred back to or used for claiming back expenses. Although this can be a time-consuming task, business bookkeeping and other legal documents have to be kept up-to-date and is a vital aspect of managing your freelance finances. You might also need them if HMRC wants to investigate your business.

6. Find a system

One way to keep your freelance business finances in order is to find a money management system that you can use on a regular basis. Not only will this save you from rummaging around looking for a specific receipt but it will make life simpler when it comes to filling out your tax return. You can choose a cloud-based software such as Xero or a bookkeeping spreadsheet.

The most important thing is to find an accounting system that works best for you. Alternatively, you can hire an accountant if your bookkeeping proves to be too much of a headache for you.

7. Claim your expenses

Knowing what you can and can’t claim when it comes to business expenses is a useful way to ensure your business is tax efficient. This is because it will reduce your profit, and as a result, will reduce the amount of tax payable to HMRC. For example, many freelancers run their businesses from home so there are options to claim for your home office.

You can also claim for things like business supplies, travel and training, providing you have proof by keeping your receipts. It’s important to familiarise yourself with this so you’re not overpaying any tax.

8. Stash your cash

Even though freelancers don’t always have a regular income, it doesn’t mean an emergency fund can’t be saved. Having a contingency means you’ll have some cash put aside for unexpected expenses or when there is less work coming in. If these issues arise, then you’re already prepared in advance, rather than having to rely on credit cards or loans. Similarly, you should also put money aside for a pension pot. Although retirement might seem like a lifetime away, you’ll thank yourself for factoring it into your budget.

Get into the habit of saving each month as soon as possible; just make sure it gets used for the right reasons and not dipped into for personal reasons!

9. Chase your payments

It’s enough for any self-employed person to juggle everything they need to do, let alone have to chase up payments aswell! However frustrating it is, it’s crucial for keeping your business running. Often, it could be because a client has simply overlooked a payment, but if not, you will have to spend time and effort to chase late payments.

In order to keep cash-flow rolling, strive to get your invoices paid quicker. This includes following up any missed payments as soon as possible. In addition, set time aside for invoicing and don’t let too much time lapse before sending an invoice after completing a job.

10. Plan your future

Forward planning for a freelancer is vital when there isn’t irregular work or a fixed contract to reply on. Although you might not be able to plan work too ahead of time, managing your freelance finances to ensure your business keeps rolling is something you can’t ignore.

To overcome the challenges of self-employment, always re-evaluate how you organise your business. For example, review your pricing structure, consider training opportunities and prioritise savings.

When you’re better prepared for the future, your freelancing business is likely to grow more successfully.  

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Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.