Learn to treat your clients better and be more profitable

Successful business finance relies about 80% on personal behavior and 20% on what you charge.

If you’re just getting started as a freelancer or doing any work on the side, you need a plan for your finances before you begin. My high school art teacher used to say, “Failure to plan means you’re planning to fail.” It is not enough to “figure it out at the end of the year” and then start thinking about taxes.

There is a Biblical proverb:

Be sure you know the condition of your flocks,
give careful attention to your herds;
for riches do not endure forever,
and a crown is not secure for all generations.
Proverbs 27:23

You might not be a goat herder— but you get the idea here: If you’re herding goats you’d better dilgently keep track of your flock. What’s their health? How many have you got? What are you feeding them? How much does feed cost? What will they sell for?

For me, freelancing occurs on top of my 8-5 job — that’s additional time I spend away from my family. I have to make that limited time pack the most financial punch in a world where clients are increasingly budget minded. The way to do that is to plan your finances and time.

Here are the steps I take when it comes to finances.

Bank Account Setup

It’s important to keep revenue streams separate as a freelancer. Go to the bank and set up two additional checking accounts with debit cards and name them:

1. Operating Funds
2. Taxes

Neither of these can be your personal checking account. These are dedicated to the freelance gig. They need to be checking accounts because a) you’re not looking to make money off of these accounts (from interest) and b) you’ll be transferring money in/out of them and a savings account will incur expenses for frequent transactions.

Operating Funds

Again, this account is not your personal checking account. This is where three things happen:

1. You deposit payments here
2. Business expenses come from this account.
3. You pay yourself from this account.

Keep enough in this account to purchase stock photos and services (like your web host) and keep an eye on it. This account is helpful because you’ll have a clear backup record of every transaction that occurs. Banks tend to be better book keepers than freelancers, and if there’s a doubt in your mind about your money, you can always look it up at the bank.

Taxes

When you pay yourself (by transferring from Operating Funds to your personal checking) for any job, take about 15-20% right off the top and put it into the Taxes account. This way, come next April, you won’t have a nasty tax bill looking you in the face. I can’t emphasize this enough as the first step.

It’s tempting to take it all now and wait to deal with Uncle Sam later. The problem is that Uncle Sam doesn’t take kindly to waiting for payment.

Just take that money and put it there and leave it. Don’t invest it (what if the market goes down when taxes are due), don’t put it in a CD (if you had an emergency expense you would incur a penalty for early withdrawal).

It sits there and makes life easier in April. That’s its only purpose.

For Example

So, let’s say you get paid $1000 for doodles on a napkin or something. Now what?

1. Deposit the check into Operating Funds
2. Pay yourself $700 by transferring money from Operating Funds to Personal Checking
3. Transfer 15-20%  ($140) of your pay into Taxes.

This leaves $160 in the bank to cover the expenses you always have, and to save up for a new equipment (Macbook Pro).

When April comes, you’ve got enough cash to pay your taxes, and you kept money in the bank for expenses.

Credit Cards (No Thanks)

Notice that neither of those accounts are credit cards. You’re going to get dozens of credit card offers as soon as you start a business. Ignore them. If you can’t manage your finances without borrowing money to cover your expenses, something’s wrong with the way you’re managing your money.

The truth about credit cards is that they’re not necessary for business, and the “rewards” are a joke. Nobody got rich with sky-miles. When you manage your business finances properly, you won’t feel the need to use credit cards. On top of that, you’ll probably reduce your expenses: a study of credit card use at McDonald’s found that people spent 47% more when using credit instead of cash.

Disciplined Bookkeeping with Freshbooks

Freshbooks makes keeping your books up to date a breeze, but it requires discipline. Every time you purchase a stock photo, you put that expense in the books. Every time you sign up for a monthly service, you put that expense in your books. Immediately. Without fail.

If you don’t do it instantaneously you’ll never “get caught up.” Doing it instantaneously every time is called discipline.

On a long term project, be sure that you use Freshbooks keep track of your hours. Your time is worth a certain minimum hourly wage, and on a project that lasts longer than a couple of weeks it’s easy to accidentally cut that wage in half.

Purchase Orders

If you order something that’s being shipped to you (tools or materials) you need a physical manifestation to remind you that it’s coming that you can stick to a bulletin board.

1. Print out the receipt or confirmation email or
2. Create a paper form to fill out that denotes date ordered, quantity, and expected arrival date.

You’ve got to do this because things don’t always make it to you (believe me, I know). If you spend $150 on materials that never arrive, you just threw that money out the window.

How this makes your clients happier and your work more profitable

When you know where your money is going and how much you’re going to be taxed on a project, you get better at realistically estimating the cost of projects. If you can estimate accurately you’ll have better relationships with your clients, and you’ll be more consistently competitive than others.

Your clients will be happier because you won’t:

• accidentally over-promise and under-deliver
• become frustrated with a project because you realize there’s not enough money in it for you

And because you’re keeping good records, you’ll also know:

• who owes you money
• what kinds of clients/projects are a good fit

And just as important, you’ll be happier because

• your bills will be paid
• you’ll have a new Macbook (eventually)

I hope this helps someone just getting started. If you have something to add, please leave a comment?