Small Business Advice Week: managing your finances
To mark Small Business Advice Week, IPSE will be contributing to the discussion with a series of advice blogs written exclusively with the small business community in mind. For more information on Small Business Advice Week visit the website or join in the conversation on Twitter using the hashtag #SBAW.
As a freelancer, one of the most important things to master is managing your finances. How do you measure income against expenditure? What do you do if a client doesn't pay? How do you plan for the future?
Here are a few quick tips to help keep your finances in order:
Keeping an eye on your finances
First you should establish a comprehensive understanding of your income and expenditure. This can be easier said than done for freelancers who often contend with irregular and volatile incomes. It is difficult to predict when to expect the next payment, while securing the next contract is a regular concern. It’s worth taking an average of your earnings across a longer period of time – 6 to 12 months, for example – and use this as a basis for determining your average income over a given month. If you have data over a longer period of time, a year-on-year comparison is a good starting point.
Measuring expenditure is easier, particularly if you are vigilant with keeping your receipts and record your outgoings. Online accounting service Intuit QuickBooks is an excellent tool for this. Once you’ve established this…
Breakdown your finances
Categorise the difference between essential expenditure, such as rent/mortgage, food shopping and loan repayments, and luxuries like eating out or clothes. Prioritise what you can’t go without, monitor your spending and set yourself limits. Once you’ve done this, stick to it.
If you’re lucky, clients will pay reliably; either on a weekly, monthly or on an adhoc basis. If you’re unlucky, some clients may try to avoid paying at all. While you can never 100 per cent guarantee the reliability of a client's payment culture, there are things you can control.
If payment is overdue, a polite call to the accounts department is usually all it takes. Don’t be shy about this – as long as you’re friendly, you will usually find people are responsive and helpful. It’s very rare that a client has deliberately withheld payment. But if a client or agency does completely default on payment, you’re entitled to charge interest on the debt. If they still won’t pay, IPSE members can claim up to £10,000 compensation.
Saving for the future
What if your income changes unexpectedly in the coming months? You should anticipate this by putting aside money every month either for a rainy day.
With interest rates at a historic low of 0.25 per cent, returns for savers are poor. If you read the small print, regular savers accounts with higher rates give pitiful returns if you make a withdrawal before one year. Far from ideal if you need access to cash between projects. Those able to take on a little more risk can opt for stocks and shares ISAs or peer-to-peer lending. These offer higher returns - but you risk losing capital - and it can take time to withdraw cash. Surprisingly, some current accounts now offer better returns than ISAs.
The newly introduced Lifetime ISA (LISA) is a savings vehicle built specifically for young people looking to save for their first home, and also helps the self-employed save for retirement. Those between 18 and 40 can deposit up to £4,000 a year until the age of 50, and the government tops up the funds with a 25 per cent bonus when withdrawn tax-free aged 60. But beware of the steep 25 per cent fees for withdrawing funds early.
Our members have access to IPSE Futures, which provides pension, life insurance and private medical healthcare schemes at group rates.
So, budget, plan and, like all good freelancers, be flexible!
Stuart Sanderson is IPSE’s press and PR intern. Stuart works for Hudson Contract Services and is currently studying at Manchester Metropolitan University.Finance, Tax, Pensions, Late Payments, IPSE News, Affiliate News