Finances for Freelancers

Filed by team twago on April 21, 2010

Everybody enjoys working on things they really like: programmers code, designers make graphics and translators bring texts from one language into another. And then there are tasks, which are rather dreadful – like finances – a necessary evil.

Freelancers and self-employed are a one-person company. In other words, they are boss, controller, sales and distribution pros, product developers, in charge of marketing and of course CEOs of their respective fields of business. This means they must be flexible, multi-functional and have a comprehensive knowledge and be well-versed in lots of areas of business management. One of these areas is the financial sector. In this article we will clarify some important cornerstones for securing and administering financial issues. For most freelancers and self-employed, financial issues are certainly rather an evil. Nevertheless, it is a very necessary evil, since without a financial plan and knowledge about financial management, a creative business idea can financially drown faster than expected.

Finances sometimes are a hurly-burly for freelancers

The advantage of freelancers compared to regular employees is certainly that they make more money. Until this is the case, however, that one earns good money as a freelancer, one often has to relinquish quite a few comforts for the time being. The breakthrough does not come right away, often only after three years. A lot also depends on the right handling of finances. The uncertainty factor in being self-employed is indeed the regularity of the income. It’s not always easy to predict at what time how much can be booked on the credit side.

Oftentimes, the question of calculating the income is not easy to answer. A simple, but effective formula could be the following:

Income = sum (turnover of ongoing projects) + sum (tender value of potential projects * chance for a contract) sum (expenses) taxes

The sum of the ongoing projects is rather easy to determine. The formula for the sum of potential projects can reliably be illustrated with the following example:

Project/JobTender ValueContracting ChancePotential Value
Sum11,200
110,00050%5,000
28,00040%3,200
34,00075%3,000

Investment

The formula can be determined for a certain period of time and then be broken down to a monthly income. From this results a sum, which can be invested on a monthly basis apart from spending money on daily requirements: either for a savings concept, an investment plan or for paying back a loan. But just because one can, one should not think that one has to do this. Money, which is left over, should be invested well planned and advised, first and foremost in oneself. For instance, one can invest into marketing or in other projects, which run along the way and secure a stream of income.

Price increase

Once one is established on the freelancing market and has more requests for assignments than time to fulfil all these potential projects, it is time to increase the price. This only works out, however, if the deals don’t decrease due to the rate increase. In other words, it should be carried out rather cautious and well planned. The following example illustrates the positive effect a price increase can have. If one doubles the prices (which, of course, is exaggerated), based on a 40-hour work week and loses half of the assignments, one still has the same income, but 20 hours more time on his hands. This time can be invested into the acquisition of new customers. This is admittedly a very simple example, but it shows the tendency, how pricing can be used as a set-screw for more than just income.

Of course, freelancers endure hard times as well. But these hard times are followed by better, greater times in which one can save money. Due to the not always predictable monthly income, the rule “put 10% aside each month” is not applicable unconditionally. There are months, in which one might possibly be unable to put money aside from 0 €. Therefore one should save more than 10% in months with high income in order to avoid problems in months without income.

Thus, always keep an eye on financial issues. Hidden costs are everywhere, but there is also always hidden potential for new sources of income, which want to be discovered.

You might also be interested in these articles

Business plans for freelancers – more than just annoying gadgets

Don’t be afraid of small projects

Freelanceswitch.com – Financial

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team twago brings you the best news about working online as a freelancer and finding the right freelancer for your projects. You can find tips, tricks and guidelines for using the twago freelance platform, plus much more. Team twago is made up of native speakers from several countries.

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