Finance is a scary word for many of us as freelancers. If we’re experts in writing and design, we’re not necessarily the most adept at crunching the numbers. Starting a business may seem simple when your high quality service is killing it, but if you can’t get your finances straight, it doesn’t matter if you’re a sales expert, things will very quickly become chaos!

In this blog, we’ve gathered together some of the key financial information that all freelancers should know. On this page there are some of the most important things you can possibly learn before you start your freelancing career, and if you’re already freelancing and you’re not totally clued up on these topics, now is a great time to learn!

These day’s we’re so lucky, we live in a digital age and there are thousands of online resources to help you get to grips with things. There are plenty of entrepreneurs and developers out there trying to make our lives easier.

Without further ado, let’s look at how to manage your finances as a freelancer:

How Do I Pay Myself as A Freelancer?

So you’ve just finished a big project for a client and got your first lump sum, let’s say it’s £500.

But hold up, that’s not £500 in pure spendable wages!

Now you’re a business, you need to think of your Gross Income vs. Net Income, and very importantly, all of the working benefits and taxes you’d normally have covered by payroll.

These can include things like:

• Income Taxes
• National Insurance Contributions
• Pension Contributions
• Student Loans

But as a sole trader, it’s also important to remember that in the eyes of the law, you and your business are the same entity. That means your income must also cover your business expenses – this is where Gross vs. Net comes into play.

That £500 you got from Joe Bloggs Ltd. needs to account for any expenses that went into creating the work you did for them. If you’re a designer this might be things like your Adobe CC subscription, the price of digital assets, or even your web hosting. There will be expenses directly related to the job, and continuous expenses like your energy bills and home office supplies.

And yes, the cost of biscuits can usually be offset as an expense.

The good thing is, even though these things cut into your profit, they also reduce your personal taxes. If you used money to pay for biscuits as business-y subsistence, then they’re a business expense, not a personal purchase.

This is why it’s really important to have two bank accounts when you’re a Sole Trader freelancer.

Why Two Bank Accounts?

One bank account, is your business bank account. This ensures it’s clear to you, and more importantly, to HMRC, that your business income and outgoings are not related to your personal income and outgoings.

Otherwise, you’ll have an accountant’s worst nightmare on your hands at the end of the year – sorting through thousands of transactions individually to categorise them by personal or business.

It also then becomes tricky to justify expenses like travel if you’re audited. You’d have to provide proof that the expenses were business related.

Keeping track of proof of business expenses in the form of receipts is essential. Luckily there are plenty of apps where you can log them.

Calculate Business Debts and Savings

The next thing you’ll want to do is work out a sensible payment plan for your business debts; for most freelancers these costs are quite low because we tend to work with business assets that we already have, such as computers and home offices, but you may have made a few essential tech purchases that you’ll need to account for.

Decide how much, or what percentage, you’d like to put away each month to cover these.

It’s also wise to put away some business savings each month, this will help tide you over in times of uncertainly, and if you have a business problem such as a legal complaint, or if you need to replace or upgrade and essential piece of kit.

How Much Do You Need?

Once you’ve looked at your overheads and costs, and made a sensible estimation on business debts and savings, it’s time to start thinking about your actual pay.

The first question to ask yourself of course, is how much do you need?

If freelancing is your side hustle and you’re covered by your day job, this is a bit easier. Otherwise, you need to think about your core living costs – housing, food, bills and travel at the minimum.

Of course at first, you might not be able to cover this fully, it’s important not to go full-time with freelancing until your core costs are covered so you can live to a reasonable standard. It’s advisable whilst Freelancing on the side, you put away as much as you can into savings so you have a safety net at times when income is inconsistent.

Once you’re at a confident stage, you’ll need to think about more than just the bare minimum. Most financial sources recommend that no more than 45% of your total income should go on rent an utilities, so consider this in your equations.

Making it Work

So now you have a figure in mind, how do you keep track of everything so you don’t overspend?

Well let us let you in one of the most valuable tips you’ll ever be given; accounting software.

Spreadsheets might strike fear into your heart – we’re not all accountants by nature, but there are plenty of businesses out there who recognised the struggle of small businesses and sole traders.

The concept is really simple, you get an app on your phone or a piece of software on your computer and you log all of your financial transactions into it. This can be done daily, weekly or monthly, but the more often you do it, the easier your life will become.

You can even link most solutions to things like Paypal, your bank account, or whatever you use to process transactions, and it will automatically import all the data. That means it’s just day-to-day business expenses to log!

With a little simple video training, you can learn to use these solutions to file your taxes and accounts every year, but what we really recommend is that you hook yourself up with a virtual accountant.

A remote accountant can use the data you log into your software to manage everything. Including your monthly pay.

That means you can focus on what’s really important; running your business.

It’s really that simple! Let us know in the comments below if you’ve got a burning question about paying yourself as a freelancer, and we’ll do our best to include the answer the next time we update this article.