As a freelancer, you may dedicate your time to working on client assignments and set aside managing your finances as a second priority.
It is often the case with freelancers and solopreneurs that they check their finances and get their accounting books in order only when it is time to submit their tax returns.
Needless to say, this is not a healthy approach. Healthy cash flow is the bloodline that keeps your business alive and thriving, and without proper finance management, your business will almost inevitably suffer.
Here we highlight important skills that will help you get your business finances in order.
#1 Record keeping
The first and most crucial skill you will need to learn to manage your finances is record keeping and documentation.
Each transaction that you carry out, whether it involves paying money, receiving money, or even the accrual of earnings (invoicing before receiving payment), must be recorded.
You should write everything down with all the details such as the date, reference numbers (for invoices, receipts, and others), the amounts, the exchange rate if your local currency is different from the payment currency, and others.
Also remember to keep any supporting documents attached to their respective transactions.
To record those details, you can use paid or free accounting software (such as Zipbooks, Akounting, Slickpie, and others), which will help you capture the right information and generate reports when you need them.
Most of these programs have invoicing and receipt scanning capabilities included. You can also use MS Excel for this purpose, but you will need to know how to structure your data, and it will probably take a longer time.
Record keeping is crucial because you will need to rely on your records and data when making decisions and submitting your tax returns. Your data needs to be accurate and checked to avoid making decisions on false information or filing false tax returns.
As a freelancer, your income probably fluctuates, while your basic expenses remain steady. Your income may be high during some months and low in others. This requires some planning and budgeting on your part.
As a first step, you need to have a financial cushion to cover your expenses in slow months. The second step would be to build a comprehensive budget—weekly, monthly, or annual, to forecast your expenses (the shorter the time frame, the more accurate your estimates are).
Your actual expenses will probably deviate form that budget, but this does not mean that your budgeting efforts are futile.
You should calculate the deviations from planned expenses and identify the reasons. Did prices increase unexpectedly? Did you buy things you did not need? Did you purchase from the wrong suppliers?
You should also include a budget line for unexpected expenses as a buffer.
#3 Pricing your services
While budgeting your expenses enables you to keep your outgoing cash flows in check, pricing your services properly ensures you earn enough income and helps you manage your incoming cash flows.
Most freelancers price their services at the lower end of the market because they believe the market is overcrowded and another freelancer with a cheaper service would land the client.
However, this is based on a misunderstanding of how to do business.
To be able to charge high fees for your services, you need to ensure two things.
First, you need to ensure you are targeting the right clients – clients who have demand for your services and are willing to pay a reasonable rate for your time.
Second, you need to offer a high-quality service to them. In practice, this means that you should deliver exactly the results they are asking for and meet or exceed their requirements and expectations. Once you do, they will refer you to more clients and help you grow your business.
#4 Communication skills to collect payments from clients
Delay and difficulty in collecting payments are common issues that freelancers in many professions face. Addressing this issue requires patience and communication skills.
Some clients have bureaucratic processes that delay payments, while others simply have no intention to pay. Your default approach should be to try to claim payment and collect it amicably.
The first step would be to send the client the invoice with a due date and ask for a confirmation. You can send a reminder in a few days, and then yet another reminder a few days after that.
If you receive no response, you can try to reach out by phone. If that does not work either, you can visit them if they have offices in your area.
Persistence and perseverance are crucial here. You need to send reminders for as long as necessary to receive a response or hopefully, due payment.
To ensure clients do not default on payments, there are two potential measures you can take.
First, you can do your due diligence, conduct research about the client beforehand, ensure they are legitimate, and report any issues when dealing with them.
Second, you can choose a good escrow services company to ensure you will get paid when you deliver the task, as those escrow companies provide protection for both buyers and sellers online.
#5 Managing your time
Your time is a finite resource, and while you can recover financial losses, time lost cannot be recovered. Charles Darwin once said: “A man who dares waste one hour of his time has not discovered the value of life”.
Loss of time is a loss of money, so you need to organize it wisely, as this will directly affect how much productive work you do and how you determine the prices for your services.
The first step is to conduct an honest review of how you spend your time. List all the things you do and identify the tasks that contribute the most to achieving your financial goals and those that contribute the least.
Then, rearrange them by that order. That is, do the things that matter first. In some cases, you may need to delegate the tasks that do not help you much in achieving your goals but still need to be done.
You will often find that most of your time is divided between two main tasks: marketing your services and completing work for clients. Both are crucial for your financial success, and you need to find ways to reduce waste of time for both while maintaining the same results.
However, you also need to allocate time for managing your finances. This should not take more than 15 to 30 minutes (or less) a day if you do it regularly.
Last but not least, allocating time for each task and setting reminders ensures you get things done. This technique is called time boxing, and if done right, it reduces distraction and increases productivity.
#6 Financial analysis and MS Excel skills
As a freelancer or solopreneur, you usually do not need the advanced financial analysis skills of an investment banker. However, you still do need to have some basic knowledge of key financial ratios and excel functions.
This is especially true if you are planning on taking a loan to grow your business. You need to be able to read and analyze key reports like the balance sheet, income statement, and cash flow statement.
The cash flow statement may be the most important among those reports since it will show you months during which your expenses exceed your income (budgeting, pricing, and marketing skills help you manage cash flow effectively).
The second most important report is the income statement, which will show your net income after deducting expenses. Most accounting software programs offer you the ability to analyze those reports directly or export them to MS Excel.
Understandably, managing your finances may not be the most fun part of doing business. It must be done nonetheless, as it will keep things organized and help you make informed decisions. The abovementioned skills should set you on the right path.
Every additional skill you learn will usually improve the financial performance of your business. However, some skills should be prioritized as they offer results quickly.
The above-suggested skills are just the beginning, and as Isaac Asimov said, education is not something you can finish. The more you learn, the better you are at scaling your business to the next level.
It is highly recommended that you assess your current skills (do a skill audit), identify your business objectives, and then determine what skills you need to add to your repertoire.
New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
- Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
- VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
- Invoice Template – Free template and step-by-step guide so you can get paid by your clients.