Freelancing and contracting can be a very rewarding career move in terms of freedom of work, schedule and location choice. As well, it can be financially rewarding. However, what that takes is to avoid some of the common financial mistakes that freelancers and contractors make.
1. Skipping a long-term business plan. As a freelancer/ contractor, you are running a business. Every business needs a plan, especially because it makes concrete in your mind what you are working towards.
A typical business plan is for five years, but even a two- or three-year plan is better than nothing. Determine whether you want to offer more services (possibly outsourced), hire employees (or other freelancers), etc. What gross income are you aiming at? What do you need to do to get there? Will you need to market yourself more, and if so, how will you do it? What will it cost you to build your business towards your goals?
It’s easier to determine what your ongoing efforts should include (finances, skills building, networking, client building, etc.) if you know what you are aiming for, business-wise, in X years time.
2. No long-term personal planning. You are your own employee. So in addition to a business plan, you need to have a long-term personal plan. This includes deciding whether you’re going to pay yourself a salary and when, how you’ll invest long-term for your retirement funds, how to make your money work for you, and whether to build multiple streams of income.
3. Poor business practices. How you offer your services might affect whether or not you gain new clients and projects.
- Follow up with existing clients for additional work.
- Balance your workload with both large and small projects. This builds your reputation with small clients who might someday come back to you for bigger projects. Shutting them out altogether limits your client base. On the other hand, each project takes a certain amount of “ramp up” time. Taking too many small projects can end up fragment your overall work time and end up costing you in effective hourly rates.
- Your business plan should determine what your services are and how you offer them. For example, do not always charge by the hour. On one hand, hourly rates are very clear, but on the other hand, if you have a relatively high rate, you might be “losing” potential clients who think you’ll be too expensive for them, if a project goes over time. A project rate is also beneficial if you are quick to complete certain types of work, or if you intend to outsource some of your work.
4. Not outsourcing work. Let’s say that, in two years time, you’ve decided in your business plan that you want to offer additional services. If this means that you cannot do the work, then you have a few options.
One option is to hire employees with suitable skills. Another is to outsource the work to a reputable company or a freelancer like yourself. Just be sure to avoid common outsourcing mistakes.
Outsourcing means you have less of a financial and management commitment than hiring employees. You also have both local and global choices for personnel – who’ll be relatively easy to find via the Internet. What’s more, you can outsource a great deal of business functions, including tax filing assistance, legal services, payroll and finance management, sales and customer support.
5. Not gauging performance. Whether you outsource or not, there are your own work tasks. How quickly are you getting them done? Rushing work at the expense of quality is obviously not recommended. However, to be efficient, you need to set and track your milestones, to gauge your actual performance and effective average hourly rate.
One tip: don’t focus on daily performance in terms of work done and billable amounts. Determine a daily average based on weekly and monthly totals. You simply cannot be productive to the same extent every single day.
6. Having poor work flow. Setting and tracking your performance should show you if you have poor work flow. Is work taking longer than you think it should – or longer than you can afford to have it take?
Often, being organized makes a tremendous difference in productivity. A lot of freelance work is creative in nature. While creativity itself is often an unstructured activity, productive creativity requires disciplined organization. The more organized you are, the greater periods of productive creativity you’ll have. That means either or both of higher billables or effective hourly rates.
7. Not forecasting cash flow. Because freelance work often follows a feast or famine/ ebb and flow nature, it’s critical to your financial well-being to forecast your cash flow as far into the future as possible. It makes budgeting easier, which allows you to smooth out the financial bumps. Use a spreadsheet tool such as Microsoft Excel, Open Office, or Google Spreadsheet to forecast, or outsource your finance management tasks.
8. Not factoring in payment delays. Factoring payment delays is one facet of forecasting cash flow. Consider not only the amount of time before you receive a check but the time it takes to cash into your bank account. If you are using an online payment processor such as PayPal, factor possible transaction fees as well as time to transfer into your bank account. Of course, if you have an emergency fund, it’ll help keep you operating.
9. Not building an emergency fund. Part of your budget should have an allowance towards an emergency fund. If you can build up at least three months of operating expenses, do so. Six months is even better. The more family members who rely on your income, the more months of operating capital you should try to save up. Having this emergency fund means not having to use relatively expensive credit/ loans, if an emergency occurs, thus saving on interest charges. What’s more, your funds will be earning interest for you in the meantime.
10. Not consulting the specialists. All freelancers and independent contractors should consider working with an umbrella company. This removes all of those niggling worries about whether or not you have put away enough money to pay your tax bill, knowing what is tax deductible, what receipts need to be kept and so on.
11. Not protecting yourself. Protect yourself business-wise in a number of ways: (1) Collect partial/ full fees upfront from a new client. This weeds out any client who might present payment difficulties. When you get to know a client better, you can reduce the upfront fee – or eliminate it, if you prefer. (2) Have liability and any other suitable insurance. Some large corporations actually require contractors to have liability insurance.
12. Being financially wasteful. Bootstrapping is an ideal way to build a business on minimal cashflow. The principles are simple:
- If you don’t really need it, don’t buy it. If you need it, can it wait for a while? If it can’t wait, can you get it free somewhere, or for less.
- Take advantage of freebies. For example, free or trial versions of software that you need for your operations.
- Try to use cash for everything you purchase, instead of credit. (“Cash” includes bank card/ debit and non-postdated cheques.) If you cannot use cash, pay off debt balances before interest charges kick in.
- If possible, lease instead of buying. If you are leasing, items necessary for your business, you’re more likely to be able to write them off for tax purposes than if you buy.
- If you need an office, make an optimal office selection. A new option is a local “coworking” office, where you share with other freelancers/ contractors – in case working at home is not an option for you, and a regular office is too expensive.
Keep in mind that bootstrapping is not the same as being overly stingy. Bootstrapping is a good business practice, but it’s not about anxiety over finances. Get what you do need – just try to your best to have the smallest daily/ weekly/ monthly cash outflow that’s possible, without significantly hindering your operations.
13. Lacking in self-discipline. Having to manage yourself is not something everyone is used to. Discipline of work flow and administrative tasks is not the sexy stuff about freelancing, but it’s crucial to working smart and earning a higher average rate per hour. Creating a higher effective rate leaves you the luxury of doing additional work (i.e., earning additional income) if you want to, and knowing that you can handle the work load.