Going freelance? How to manage an irregular income
Freelancing gives you scope to be your own boss, but also means managing your own irregular income.
Here are some tips to managing your freelance finances.
Have a plan for your irregular income
Start by projecting your minimum income and expenses in order to create a feasible budget for your business.
You can work out your average by adding together your yearly income and expenses, then dividing this figure by 12 to establish your monthly budget. Or, use the month in which you earned least as a benchmark for income, and the month that you spent the most as an indicator of monthly expenses.
Make sure to include business costs (such as taxes and any licensing fees) you may need to pay in your overall expenses estimate.
Whenever possible, confirm your payment schedule in the client contract.
Clients may prefer an alternative date for their own accounting purposes, but establishing this in advance can help you stabilise your cash flow.
If you are conducting a larger project, include milestone payments within the contract. You can discuss arrangements based on hourly payment, or on reaching a specific stage of the project.
Include a regular salary for yourself in your business plan, but pay essential business expenses first so that your business costs are covered.
Maintain an emergency fund
Freelancers should maintain an emergency fund to cover basic expenses when there is no other source of income.
Holding an amount equivalent to three to six months’ worth of bills and expenses can help you manage on an irregular income. With this contingency, you get scope to choose the jobs that you want and don’t need to get overly concerned by late client payments.
Separate your business and personal accounts
As a freelancer, it’s possible to use the same account for personal use and business expenses.
But, this can confuse things, and may lead to you inadvertently using business finances to cover personal costs. It also makes things harder when it comes to submitting your self-assessment tax return, as business payments would need to be extrapolated from personal transactions. It’s therefore recommended that you maintain separate business and personal bank accounts.
With these accounts, set up recurring payments for your regular outgoings to get a better idea of your overall cash flow. Bank transfers can be set up for costs relating to:
- Travel expenses
Use superior accounting software
You’ve probably chosen to go freelance in order to earn a living from one of your skills, not to spend all your time monitoring your finances.
Advanced accountancy software (such as Xero) can help you manage an irregular income by providing an at-a-glance cash flow overview. This enables you to make strategic decisions when they matter most.
Xero comes with a host of automated features that can help you with invoicing, tracking expenses and submitting your self-assessment tax return. The software can even be synchronised with a specialist accountant, giving you the chance to receive expert advice on freelance cash flow management.
Call on the friendly 3 Wise Bears team for more expert accounting advice for freelancers.