A lot of web designers start their careers as employees for larger design firms. However, it seems inevitable that most designers will at least consider going out on their own as freelancers, either for side jobs or full time. One major key to any successful freelancing career, though, is to stay on top of your finances.
Below are fifteen things you need to keep in mind when it comes to your freelance business financials. Follow these simple best practices and you’ll be on much more solid financial footing with your freelance web design business. Of course, make sure you speak with an accountant and/or lawyer to make sure you’re doing everything you need to for your local area, especially when it comes to contracts and tax responsibilities.
1. Always Have a Contract
Any time you’re taking on a project for a client, you need to have a contract or agreement in place before you start any work. This is not just to protect you from an unscrupulous client, but also to make sure that you and your client are on the same page in relation to the work that needs to be done.
Your contract doesn’t necessarily need to be filled with legalese and eighteen pages long. Unless you’re dealing with very large amounts of money, a simple document that includes the scope of the work being done, the time frame it’s expected to be completed in, and the payment amounts and when they’re due. For more complex or longer term projects, you may want to have a lawyer draw up a contract, or at least look over the agreement you’ve created.
2. Always Get a Deposit
There’s nothing worse than spending two weeks working on a project only to have a client not pay (or take forever to do so). That’s why you should always get a deposit up front, before you start any work.
The amount of the deposit may vary based on the size and scope of the project. For a small project, it’s not unreasonable to ask for half of the total up front. For larger projects, you might ask for a quarter or more of the total before getting started.
Basically, you want to make the deposit large enough so that if you don’t get paid, or it takes months to get paid, you’ll have enough money up front so that your time wasn’t completely wasted. It also helps weed out the clients who aren’t serious about the work you’re going to perform, as they won’t want to pay anything up front.
3. Carefully Calculate Your Prices
The price you charge for your services can make or break your freelance web design business. Charge too little and you won’t make enough money, or you’ll brand yourself as “cheap”. Charge too much and you may have a hard time getting clients. You have to put some thought into what is a fair price for both you and your clients.
FreelanceSwitch has a great Hourly Rate Calculator you can use as a starting point for setting your rates. If you’d rather charge a per-project fee, you should still start out with an idea of how much you want to make per hour and then figure out the number of hours you expect a certain type of project to take. You can set your fee from there.
4. Use Free Tools When You Can
There are a ton of awesome tools out there that can make you more productive, make your work better, or that you just plain want. And it makes sense to purchase tools that are going to make you a better web designer or a better business person.
But there are also a ton of free tools out there that are sometimes just as good as the paid options. As a freelancer, it’s important to keep your expenses down wherever you can, and using free apps rather than paid ones when you can is a great place to start. Especially when you consider that all those $5 and $10 and $20 subscription fees can add up quickly.
Just be aware that sometimes the paid apps are actually better than the free options. It’s better to spend $10 a month on something that lets you focus more on your paid work and earn more money than to use a free app that doesn’t really help you out.
5. Understand Your Tax Position
Taxes are a reality for every freelancer and small business owner out there. When you work for someone else as an employee, they tend to take care of all of your tax issues for you. But once you’re out on your own, the responsibility lies with you.
Now, it would be impossible for us to cover all of the tax responsibilities you might have in a single blog post. But it is important for you to find out what those responsibilities are. Talk with your local tax department or to an accountant before you start earning money to find out exactly what you need to do to make sure you don’t run into problems during tax time!
6. Outsource Efficiently
Too often as entrepreneurs we try to do absolutely everything ourselves. It’s as if we have something to prove, that we can do it all. But there are times when it’s better to outsource. These times might be related specifically to your client work, or they could be peripheral business activities like collecting past-due accounts or keeping your books up to date. But sometimes it’s better to do things yourself rather than outsourcing.
One simple rule of thumb for figuring out when it’s best to outsource is to figure out how much time it will save you to use a subcontractor and then figure out how much you can earn in the same amount of time. If you can earn a lot more in the time it would take you to do the work you can outsource than what the outsourcing will cost you, it may be a good idea.
Don’t overlook outsourcing in your personal life. Hiring someone to come in and clean once a week can be a great use of your time, and frees your time up for either more work, or more personal time. So look at outsourcing from all angles, and see what will make your business or your personal life run smoother while also being cost-efficient.
7. Track Your Time
Whether you charge by the hour or the project, it’s a good idea to track your time. There are a ton of free time tracking apps out there that make it easy to monitor how much time you’re spending on each of your projects.
Some might ask why it’s necessary to track your time if you aren’t billing by the hour. The reason is that it’s important to keep track of your hourly earnings even if you’re charging by the project. If you think a particular kind of project should only take you twenty hours, but in reality you’re spending forty, you might need to adjust your rates for future projects. The only way to know for sure how much time you’re spending is to track that time, especially if you’re one of those people who multi-tasks or works in bursts rather than for many hours at a time.
8. Use Invoicing Software
Invoicing software has a number of benefits. The first is that most options will keep track of your invoices and payments for you. This makes it a lot easier to manage your cash flow and know when you can expect money to come in.
Better invoicing programs usually include tools for creating proposals, too. This is useful because you can convert those proposals to invoices quickly and easily, speeding up your billing process.
9. Send Invoices Promptly
You should send invoices as soon as work has been approved, or according to the schedule laid out in your contract. Generally, your clients will expect to receive an invoice soon after work is complete, and will be prepared to pay it promptly. If you delay in sending it, they may forget about you and the money may not be readily available when you finally do send the invoice.
So, if you want to get paid on time, make sure you send your invoices to your clients as soon as possible.
10. Make It Easy for Your Clients to Pay
Another key to getting paid promptly is to make sure you make it easy for your clients to pay. By that, I mean it’s a good idea for them to be able to pay by check or credit card, even if it’s just through PayPal. You might even consider offering a discount for payment in your preferred method, regardless of what that method is.
11. Follow Up On Past-Due Invoices
Don’t let your clients slide when it comes to paying their invoices on time. Send them a reminder email when their bill is late. If they still don’t pay, consider offering a payment plan to them.
Many invoicing apps offer the ability to automatically send reminder emails on a schedule for past-due amounts. This can be a great way to streamline the collections process without spending a lot of time on it.
If your client still doesn’t pay, you should consider whether it’s in the scope of your contract to take down their website or otherwise remove work you’ve done for them. This can be complicated depending on how your contract is worded, but it’s something to keep in mind.
12. Keep Careful Track of Income and Expenses
Keeping records of what you earn and what you pay out is vital to financial stability. Make sure you keep track of all of your invoices and receipts for every business-related expense.
These are not only important for tax time, but also for making sure you keep tabs on where your money is going. If you don’t know where you’re spending your money, it’s easy to waste money on things you don’t need.
13. Regularly Review Your Books
This is closely tied to the last point. Whether you do your books yourself or hire a bookkeeper or accountant, it’s important to make sure you keep an eye on your books and where your money is coming from and going to.
14. Keep a Separate Business Bank Account
Keeping your business bank account separate from your personal bank account is important, but not necessarily as important as some financial advisors would have you believe. If your only income comes from your freelancing and you’re a sole proprietor, it becomes less important to keep separate accounts.
Realize, though, that it’s vital for you to keep good records of the expenses that come out of your account, whether it’s a dedicated account or not. A dedicated bank account can make it easier for you to separate your personal and business expenses at the end of the year, though good bookkeeping practices can do the same.
15. Save for Rainy Days
Anyone who’s freelanced for long knows that your income is rarely steady. One month you might work 60 hours a week and bring in twice your normal cash flow, and the next month you might only have two paying projects. These peaks and valleys are a normal part of freelancing, but they can be a huge shock for a new freelancer. It’s all too tempting to take the excesses of one month and spend them, only to find that the next month you come up very short.
Set aside the excess funds you earn in a given month so that when you have a slower month (or even when you want to take some time off) you don’t come up short paying your bills or other necessary expenses. Once you have a few months worth of income saved up, then you might opt to spend some of the excesses you earn some months, but until you’ve got enough to endure the slow periods, it’s not a good idea.