There’s a whole lot to love about running your own freelance business. There’s incredible freedom and flexibility throughout your workday. You can work from home, at a coffee shop, or wherever you’d like. Your closest co-worker is your dog. And above all else, you’re your own boss.
But that’s also where freelance life can get scary.
You’re not just your own boss. You’re also your marketing department, accountant, social media manager, and any other role a normal business would fill with other working professionals. With all these responsibilities, letting your financial management slip can be all too easy. Suddenly, your once profitable solo venture is bleeding money, leaving you in the red.
With many business owners struggling to make ends meet during a global economic recession, a good indicator of the success of your business is how much discretionary income it creates for the owner/shareholders. This means how much profit is left for the owners after paying all expenses and taxes. As a freelancer, you must keep a careful eye on that income, lest it falls into the danger zone.
In this article, we’ll walk you through several ways to take control of your freelance finances, monitoring every dollar that comes in so you never fall on hard times.
1. Seek out monthly retainers with clients
One of the most common issues with freelancing is that freelancers never know how much cash inflow to expect in a given month. The volatile ebb and flow of freelance work leads to periods with a ton of work and money. On the flip side, there are sometimes months with nothing going on.
One of the best ways to counteract this and create a more reliable financial situation is to seek monthly retainers with your clients. That means the client pays a fixed amount every month for your services. That total doesn’t fluctuate based on your work hours or workload.
Some months, this might mean you actually lose money, but in those slow periods, you’ll be able to bank on reliable income to help you plan things out financially.
2. Incorporate and open a business bank account
If you’re considering starting a freelance business, one of the most important things to do is register it with the appropriate state agency to make it legit.
This registration process often includes specific costs that you need to be aware of beforehand. Research “How much does it cost to start an LLC?” or whichever business structure you decide on from the options in the image below.
Registering your business makes it easier to separate your personal finances from your business income. Also open a business bank account to make the bookkeeping, legal compliance, and annual taxes easier to track. A true profit killer is a massive tax bill you weren’t expecting.
Of course, when setting up these accounts, don’t forget about cybersecurity. Use strong authentication methods to secure your financial health as a freelancer. Passwords can be a weak link in your security system, as they can be easily forgotten, guessed, or stolen.
A good option could be passwordless authentication, which allows you to use biometric factors like fingerprints or facial recognition to authenticate users, making it much harder for unauthorized individuals to access your accounts.
3. Require notice periods for contract cancellation
As a freelancer, you’ll quickly realize that clients often come and go. That doesn’t necessarily have anything to do with your skill level. It’s just the nature of the business. But a sudden cancellation can have a huge impact on your finances. If you’re caught completely unawares, there might be a financial struggle in your immediate future.
Building cancellation notice periods into all freelance contracts is always a good idea. A 30-day notice provides plenty of time to find a replacement client to compensate for the lost income. However, most clients don’t want that kind of commitment, so you might have to settle for around two weeks’ notice.
While some clients may balk at such a request, it’s far from unreasonable. Whenever you leave a job, it’s customary to give at least two weeks’ notice. It stands to reason that it wouldn’t be out of line for a freelance contract.
Also, that notice period goes both ways. If you decide to dump an unreasonable or overly difficult client, you’ll have to provide them with the same notice period. This allows them to find another freelancer and avoid any disruptions to their workflow.
4. Keep applying for freelance jobs
Because of the volatile nature of freelance work, you must never stop looking for more clients — even when you’re at your capacity.
It always helps to have backup options in case a client suddenly lets you go (and you didn’t have a cancellation notice). Constantly putting yourself out there can be a good reminder that other potential clients exist.
It can feel like the end of the world when a client suddenly drops you. But it won’t be as crushing a blow if you’re constantly hitting up job boards and sending out your portfolio — because you know there’s a wealth of opportunity.
Plus, applying to new gigs constantly might give you the opportunity to find better paying work, which means you can drop one of your lower-paying clients.
5. Use bookkeeping software and hire a CPA
A sudden massive tax bill can drain your business bank account in the blink of an eye. All too often, this happens because of poor bookkeeping.
If you’re trying to keep track of finances by yourself with a simple spreadsheet, there’s a good chance you’ll miss something and end up paying out a lot more than you had anticipated in April. That’s why you should invest in automated bookkeeping software to make the entire process seamless and mistake-proof.
For example, accounting software Quickbooks Online has several useful functions, like:
- Tracking invoices
- Connecting with bank accounts
- Sending out invoices
- Generating financial reports and forecasts
- CPA connection
That last feature is noteworthy. You’ll be able to grant your CPA access to your bookkeeping software and make their jobs that much easier.
You should always work with a CPA, as they know how to manage your taxes and save you the maximum amount in legal deductions every year.
6. Build relationships with your clients
Clients are the lifeblood of your freelance business. So don’t underestimate the power of genuine relationships as the key to your success.
But it goes beyond delivering great work. It’s about establishing trust and loyalty with your clients. Why?
When you have a positive and professional relationship with your clients, you’re more likely to receive repeat business and referrals — crucial for a sustainable income stream.
That sounds idyllic, right? So here’s how you do it.
- Make first impressions count
- Promptly answer client emails
- Maintain a professional yet friendly tone
- Go the extra mile to deliver high-quality work
Think about it this way, when you reach out to a business, and they respond immediately, and with a professional tone, it makes you feel good about working with them. Well, the same goes for your clients.
Responding quickly to their inquiries, keeping them informed about the status of their projects, and being courteous and friendly can go a long way in building genuine relationships with them.
It’s also important to be transparent about your availability and the scope of your services. Set clear expectations about your rates, deadlines, and the services you offer. You can build trust by simply delivering on your promises. So don’t bite off more than you can chew.
Plus, when everyone is on the same page, there’s less chance for misunderstandings and a better chance that a one-time opportunity will blossom into a long-term, mutually beneficial collaboration.
7. Keep a financial safety net
Because of the unpredictable nature of freelance life, it makes sense to keep a financial safety net in place.
Open a business savings account and build a fund for rainy business days. You should always have at least three months of operating expenses on hand to cover light months, pay vendors or contractors, and jump on a new opportunity that might not pay out for weeks or a month.
Despite preparation, unexpected expenses can be a challenge for any freelancer. However, there are steps you can take to protect your finances from unexpected costs.
For example, you may already have insurance to protect your business, but consider adding personal insurance options. Some freelancers overlook the importance of ensuring important areas of their daily life that might be costly otherwise.
Pets are a great example. By investing in, for example, cat insurance, you can protect your furry companion and your wallet from unexpected medical expenses. It’s just one more way to safeguard your finances and ensure you stay on track toward your financial goals.
8. Invest in tools
Much like the bookkeeping software we mentioned earlier, freelancers must invest in software tools that can help them with time-wasting day-to-day administrative tasks like marketing and invoicing.
Marketing helps freelancers develop their unique brand, which they can use as a selling point when seeking new clients. It also helps them discover new clients by networking and making industry connections. But it can be incredibly time-consuming.
Consider using helpful tools to lighten the load. For example, if you’re a video content creator, an advanced text-to-speech tool like Lovo can help you easily create videos for those involved in games, audio ads, e-learning, and audiobooks.
Similarly, employing an AI blog writer will enable you to keep producing new content regularly, which will help search engines reward your website if you work as a freelancer in digital marketing.
You should also look into a project management platform like Trello or ClickUp, which helps you to keep track of all your tasks. This will help you hit your deadlines and ensure that nothing falls through the cracks.
9. Have a side hustle
Having side enterprises that generate passive income is another excellent way to keep your freelance business out of financial difficulty.
Start a physical or digital business to supplement your freelancing income. For example, if you have property or extra space in your home, you rent it out to bring in extra income. If you create videos for your social media platforms, you can start and monetize a YouTube channel.
A side hustle can be a great way to prepare for the light months we mentioned earlier. When your freelance gigs slow down, put more effort into your side hustles to generate more passive income and stop your finances from dwindling.
Take your freelance career to the next level
A career as a freelancer can be long and rewarding. With the ability to make more money than you’ve ever made, coupled with untold levels of flexibility, you’ll be able to forge the life of your dreams over time. But financial hardships can cut promising freelance careers short.
By sticking to the tips in this article, you can keep your freelance business out of the financial hot seat and focus on keeping clients (and yourself!) happy.
Juwaria is a freelance writer specializing in the fields of SaaS, marketing, and health/wellness. Backed with 3+ years of experience, she helps brands build content that adds value to their business. In her free time, you can catch her reading her favorite books or studying the latest trends online.