There are over 56 million freelance workers in the US– but how many are establishing a financially-secure business, and how many are flying by the seat of their pants? As a freelancer, it can seem easy at first to run your business without money management, but in the long-run, a lack of financial awareness or organization can spell ruin for your business.
It’s critical that you secure a strong financial structure to ensure you’re setting yourself up for long-term success. Here are five common mistakes that freelancers make with their finances and how you can avoid making them yourself.
1. Mixing personal and business finances
As a freelancer, it can seem like a hassle to set up an entirely separate bank account for your business when you can simply send your paychecks to your personal savings account. Don’t fall into this trap! It’s important to separate your finances to keep your business and personal lives organized and separate, as well as help you better understand your business expenses and budget. Be sure to put in a little extra effort to keep these separate by setting up a small business bank account. This will help you plan for taxes, understand your cash flow, and better manage your freelancing finances.
2. Budgeting ineffectively
As a sole proprietor, it’s critical that you stay on top of your finances and create a budget to hold yourself accountable for your spending vs. revenue. Otherwise, you could be spending more than you can afford. You should be creating monthly budgets based on the money you spend on business-related expenses, like leasing an office space or travel, and the revenue you expect to regularly bring in. This is especially true for freelancers who often don’t work on a steady paycheck. And, don’t overlook the importance of including an emergency fund as part of your monthly budget just in case work doesn’t come through.
3. Not following up with overdue clients
It can be an awkward conversation to have: a client is overdue on their payment and you need to secure it for the work you’ve already completed. While this can be uncomfortable, and might even jeopardize some relationships you’ve built, it’s crucial that you set the precedent that you’re paid for your work. You need to be your biggest advocate and hold clients to their contracts. Otherwise, you’ll be working for free and your finances will suffer. Consider sending a friendly reminder email the day before payment is due, then follow up personally after payment was missed. This should help you clarify timelines for clients, and keep you organized with your payment schedules.
4. Not diversifying streams of income
In order for you to have built a freelancing career, you’re likely highly-skilled in a specific expertise. However, it’s easy to get pigeon-holed into one offering which can limit your customer base and overall business plan. Don’t put all your eggs in one basket; explore new ways you can provide service and add value to customers. Whether that means honing a specific skill or brainstorming new ways your service can apply to businesses, diversifying your income potential will help protect your financial future.
5. Refusing to outsource
Many freelancers want total control over their product and revenue. However, this can cause burnout, personal stress, and a lower quality product. Time is money and if there are certain tasks that others would complete better than you or more efficiently, it would benefit your business in the long run to hire them. If a project you’re working on requires design skills you don’t feel confident in, for example, join a freelance community space to connect with other freelancers who can help. This will help take some load off your plate, help you complete more projects faster, and even help you build relationships with others in the freelancing space for when they need help with their future projects.
When it comes to running a business, there is no magic formula to ensure your finances are in tip-top shape, revenue is constantly flowing in, and everything is organized. But, if you work to avoid common missteps and consider the options available, you’ll be better equipped to improve your finances and keep them managed moving forward.