Every freelancer is also an entrepreneur. Like any company, a freelancer can only be successful if he or she permanently earns more than he or she spends. Financial planning is therefore a central topic for every freelancer. If you are thinking of starting a freelance business, you should definitely read this article. It gives you 5 action steps to plan your financial future.
If you start as a freelancer, you will probably need computers, software, office equipment, etc. Create a list with two columns. In the first column you should list the type of investment. In the second column you should list the respective costs. Make the list as detailed as possible to avoid unexpected investments during your freelance work. Also think about what you already have and can possibly still use. Keep the investments as low as possible. You can find more details in my free e-book.
1. Typical start-up investments:
- Office equipment
- Mobile phone
- Logo & Corporate Design
- Business cards
2. List current expenditure
Apart from initial investments, you will certainly also have current expenses. Every month there are costs for office, internet & telephone, leasing rates etc. As with initial investments, you should also enter your current expenses in a list. Multiply the sum of these costs by a factor of 12 and you will see the running expenses for a whole year.
Typical current expenditure:
- Rent for office
- Leasing rates for motor vehicles
- your cost of living (rent, food, clothes etc)
- Social security contributions (health insurance, nursing care insurance, pension insurance)
- Telephone and Internet
- Mobile phone contract
- Reserves (very important for unforeseen expenses)
3. Calculate cash burn rate
The cash burn rate describes the speed at which financial resources are used up. That means you get the exact number of months until your starting capital is used up. I find it especially important to calculate this value. It shows you your time horizon until the financial means are used up and can protect you from over-indebtedness.
Here is an example of a calculation:
You have set aside 20,000 $ for your freelance work. Your initial investment from point 3 is 5,000 $. Your running costs from point 4 are 1,500 $.
Cash burn rate = (20,000 – 5,000) / 1,500 = 10 months
If you don’t generate any income, your starting capital is therefore sufficient for exactly 10 months.
I recommend you to reach a period of at least 12 months. If this is not the case, you have exactly three set screws that you can operate.
- Save some more money to increase your starting capital
- Try to reduce your initial investment (e.g. buying used computers)
- Press the monthly fixed costs (smaller office, private savings)
4. Set your income target for the first financial year
Points 1-3 not only help you to keep track of your expenses. They also show you how much you need to earn to make your freelance work profitable and avoid getting into debt. In some industries, it can take a little longer to generate a positive cash flow, i.e. until the amount of income exceeds the amount of expenses. In most freelance professions, however, this should be the case after two years at the latest.
My formula for calculating the income target for the first fiscal year:
annual income target = ((initial investment / 3) + (current expenditure per month * 12)) x 1,3
In our concrete example
((5.000$ / 3) + (1.500$ x 12)) x 1.3 = 25.566,67 $
Make sure that your income target is always visible, e.g. in the bathroom mirror or as a desktop wallpaper. Give EVERYTHING to reach this goal!
5. Check regularly
Set fixed dates on which you check the current financial status of your freelance work. View your bank statements and compare your income with your expenses. I always do this at the end of each quarter. If you have a tax advisor / financial accountant, you will usually receive a BWA (Business Analysis). In it you will find the sum of income and expenses. Compare these values with the financial planning for your freelance work.
In addition to a good positioning in the market, in my opinion profitability is one of the most important success factors for freelance work. Especially at the beginning, the focus must be on financing in order to avoid over-indebtedness. High debts and the associated interest burdens make us unfree and can sooner or later lead to the failure of a freelance activity.
Finally, I would like to recommend the following tips for your freelance work:
- List each cost item in detail and plan as accurately as possible (this article should help you)
- Build up reserves every month and take them into account in your expenses
- Keep investments and current expenses as low as possible, especially in the beginning
I hope this post was helpful for you and you liked it! What tips do you have when it comes to financial planning for your freelance work?