By tracking the right financial metrics, you uncover business risks or opportunities. You'll see what’s working and what isn't, and how to grow bigger faster.
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What financial metrics are you tracking as a freelancer?
I know, I know. Most creatives didn’t go into business for the number crunching and spreadsheets. But tracking the right financial metrics can keep you organized and put your business ahead of the competition.
When you track the right financial metrics, you start to uncover risks or opportunities in your business. You start to see what’s working, what’s not working, and where the big opportunities might be slipping right past you.
In this article, we’ll cover 5 key financial metrics every freelancer should track in 2020.
1. Profit and Loss
A profit and loss (P&L) is one of the most common financial metrics most businesses track. It’s common because it’s directly attached to an action you must be doing for tax purposes: tracking revenue and expenses.
But this isn’t a long list of all your exact transactions. Think of this financial metric as a summary of the combined expenses and revenue over a specific time period.
There’s one section that states how much you’ve earned this quarter (or year). There’s another section that states how much you’ve spent in the same time period. The total at the bottom of the P&L is simply your revenue minus expenses — i.e. your profit or your loss.
A P&L statement for freelancers generally won’t exceed one or two pages. The best part is: many accounting tools automatically create profit and loss statements based on the figures you put into the tool as you record transactions.
For my freelance business, I use Quickbooks Self Employed to track income and expenses. All I have to do is go to the Reports tab to see an automatic profit and loss statement.
2. Cost per Acquisition
Pricing freelance services requires some mental gymnastics. If you’re coming from a full-time job, it’s hard to wrap your head around billing high enough to cover your expenses — especially ghost expenses.
I’m not talking about an AppSumo deal you bought. That’s easy to track. Ghost expenses—the time and energy you devote to activities that keep your business operational—are where things get complicated.
One of these ghost costs is cost per acquisition. Most freelancers I know do their own marketing. They aren’t running ads on Facebook or Google. They’re engaging on these platforms through SEO and social posting to find leads organically. That time and energy is a business cost.
How many hours do you spend attracting leads to your services? From the social media posts you write, to that first email, to the phone call, to creating a unique proposal that caters to the exact needs of your client — what does that cost you in lost time?
There are two primary ways to track this:
Determine Your Hourly Rate
Whether you bill by the hour or not, it can be helpful to determine an internal hourly rate that you pay yourself. It helps you figure out how much certain activities are costing you.
Every day you engage in activities that range in profitability. Does an hour of prospecting on LinkedIn garner you two leads? How many of those leads will you convert? How much money will you earn from that conversion? Let’s consider an example.
Let’s pretend that I’m in the market for a white paper client.
I spent an hour (+1) on LinkedIn looking for prospects. Three people show interest. I convinced two of them to schedule a call with me. After a half-hour call each (+1), I spend two hours (+2) drafting two unique proposals. One person accepts my $4,000 bid. Between additional calls, research, writing, and basic administrative work, the whitepaper takes 15 hours (+15) to complete.
How much was my cost per acquisition? I spent 19 hours from prospecting to completion. $4,000 / 19 hours = $210 / hour. Not bad.
Four of those hours were spent trying to make the sale. So, my cost per acquisition is $210 x 4 hours = $840. Ouch. Almost a quarter of my earnings came down to client acquisition. That’s an example of a ghost cost.
Obviously, these ghost costs get even harder to track when you’re taking on dozens of projects, all requiring different amounts of time, money, and energy to find and complete.
There’s nothing wrong with ghost costs as long as you’re aware of them. When you’re unaware of ghost costs, you charge too little for your services and end up wondering where all your money went.
Outsource Customer Acquisition
The easiest way to track customer acquisition is by outsourcing or automating it. That’s when it changes from ghost cost to a line item you can write off in an expense column. You might hire a marketing team or a virtual assistant to handle lead gen and conversion, so that you can focus on client-facing work.
Let’s revisit the last narrative through the lens of outsourcing. Pretend you outsourced the work mentioned above to a virtual assistant who bills you at $20 per hour. You still have some ghost expenses, but overall things are simpler.
Your VA handles ¾ of those prospecting hours we mentioned before, with the same outcome. Suddenly, your involvement in the job drops to 16 hours, changing your internal hourly to $250. Your new cost per acquisition is ($20 x 3) + $250 = $310. You just saved $500+ by turning a ghost expense into a line item.
As Ramit Sethi likes to say, you can only cut so many expenses, but you can always earn more money.
It’s common to hear freelancers talk about their earnings as “feast or famine.” There are months when they earn a lot of money, times when the checks slow down, and there are average months that come somewhere in the middle.
In my opinion, this up and down pattern is worse than living paycheck to paycheck. That’s because freelancers tend to not know which season—feast or famine—is coming next.
That’s why it’s important for freelancers to track growth. Again, I rely on Quickbooks to track growth because it’s where I already input my revenue and expenses. For me, growth is easier to understand when it is presented visually, instead of numerically. A bar chart may go up and down from month to month, but throughout the year there should be a clear throughline of increase in average revenue.
Since income does vary each month, you can also track growth in quarters and years to see your trajectory. Sarabeth and I once experienced our lowest month in over a year—immediately followed by our three back-to-back best months ever.
Taking just one of those months out of context would have painted an inaccurate picture. When combined and averaged together, those months showed steady growth over the previous four months. (Woohoo!)
4. Revenue Diversification
Revenue diversification is another important financial metric for freelancers to track. You want to make sure your business can stay profitable even when your main client or service isn’t selling like you hope. There are two types of revenue diversification to pay attention to.
Diversify Your Clientele
The first is making sure a single client doesn’t represent too much of your income for more than a few months in a row.
A good rule of thumb I consider as a freelancer: If one client accounts for more than 40% of my monthly revenue on an ongoing basis, that can be dangerous. It begs the question: Are you financially stable enough to stay afloat when that client pauses or lowers the contract?
Diversify Your Income
The other form of diversification applies to the category of income. Building multiple income streams can be a great way to safeguard against changes in your field.
I see many freelancers also offer books, courses, consulting, and even software tools to add another stream of income to their business. It might be worth a try for you as well.
5. Target vs Actual
Last month, Sarabeth and I started a new practice in our copywriting business. On the whiteboard in our office, we created a large chart depicting our goals for the month.
The primary categories are Revenue and Subscribers. Besides these two categories, we’ve created columns labeled Target and Actual to help us remember our goals and track our real progress.
If you don’t have a whiteboard, you can easily create something similar in Google Sheets.
Every month, Sarabeth and I plan to move the Target column higher. It keeps us motivated to keep marketing, raising our rates, and growing, even when we’re busy.
The best part is, you can make this chart track almost anything in your business. You can track the number of new leads, blog posts you publish, and project pitches you send out—anything.
By putting goals and progress side by side, you can create incentives for yourself. Beyond simply hitting your numbers (which feels good on its own), you can set up rewards for yourself for achieving your targets.
What Gets Measured Gets Improved
You may be a one-person business. But you are still a business, with real metrics to track and record. In this article, I aimed to provide financial metrics that are both simple and productive to track, to make sure you stay focused and continue to grow.
Do you freelance on the side while you grow a SaaS company? If so, here are some SaaS metrics and formulas to help you calculate things like churn, ARR, and more.