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REVIEW GUIDE / COURSE 3

Finances As A
Freelancer

COURSE 3
MANAGING A GIGGIN’ BUSINESS BUNDLE
FINANCES AS A FREELANCER
MANAGING A GIGGIN’ BUSINESS BUNDLE
 Course Introduction
Well, you’ve set up your freelance business.
You’ve created the systems you need to get your
work done and manage yourself. Now, you need
to make sure your finances are in order.

Especially if you’ve previously worked as an

employee of a company, the change to providing
freelance services as an independent contractor
requires a new kind of financial literacy. In the
Finances as a Freelancer Course, we discuss the
basics freelancers need to know about getting
paid, understanding taxes, and tracking finances.

In Chapter 1, Basic Finances and Freelance Taxes,

we outline the bank and bookkeeping systems
you should be setting up to track your income
and expenses, as well as the basic tax concepts
you’ll need to know to start your freelancer
taxes. Invoicing Clients, Chapter 2, covers tips
about negotiating your rate, terms, and project
scope when you bid on new work, and how to
navigate contracts and invoices. Finally, Chapter
3, Forecasting Income, discusses how to create
financial projections for your business and keep
track of key financial goals.

This Course will take about two hours to

complete. Once you’ve completed these Lessons,
you will have the building blocks you need to
start developing the finances for your freelance
business.

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COURSE 3 FINANCES AS A FREELANCER

MANAGING A GIGGIN’ BUSINESS BUNDLE
 Your Freelance Banking and
Bookkeeping
Introduction
Imagine you’re at a restaurant with a group of 10
friends, and at the end of a lovely evening, you
get handed the bill for the table. It’s your job
to split the check, scrutinizing who got which
appetizer, entree, and drink, all while making
change for cash, multiplying app payments, and
remembering who is tipping for what.
Wouldn’t the bills be easier to keep track of if they
were just… separate?
In this Lesson, we are going to talk about how to
divide your freelance finances from your personal
finances, in order to clearly capture all freelance-
related transactions. Especially if you are a
single-member freelance business, it may be
tempting to just run your business through your
own personal bank account. If you are your own
employee, it all ends up in the same place, right?
Especially if you have filed as an LLC, separating
your business finances from your personal is
essential. One of the biggest advantages of
filing for an LLC is that you and your LLC are
technically separate legal entities. If the LLC is
liable for certain debts or legal action, creditors or
claimants can usually only go after assets owned
by the LLC, not assets owned by you the owner.
However, if you have not separated your
personal and LLC business expenses, creditors
can theoretically pursue legal action called
“piercing the corporate veil.” This action proves
that there is really no difference between the
business and the owner, and the creditor can
therefore hold the owner personally responsible
for any debts. This is a rare situation, but worth
taking seriously. The layer of LLC protection
only applies if you have actually separated your
personal and business finances.

However, as a business, you need to track your

income and expenses, for both tax purposes and
to understand your own financials. Separating
out your freelance finances is a good idea for all
types of freelancers, whether you are part-time or
full-time, LLC or sole proprietor.

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COURSE 3 FINANCES AS A FREELANCER

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 YOUR FREELANCE BANKING AND BOOKKEEPING
Why separate business finances?
Separating your business financials includes
creating a unique business bank account and
signing up for a business debit card, credit card,
or checks under your business name as the
payee, used only for business transactions. Any
non-business expenses stay on your personal
cards and checks.
Separating your freelance banking and
bookkeeping from your personal expenses is
beneficial because it can help you:
1 - Ensure accurate tax accounting
If you use one credit card for both your personal
and business transactions, come tax season, the
overlap can muddy the waters. There are many
legitimate business deductions you can claim as a
freelancer (which we’ll cover in the next Lesson).
However, when it comes time to document
business expenses for your taxes, will you be able
to remember which transaction was a legitimate
business expense, and which was an afternoon
ice cream run?
Not only will overlapping finances make it difficult
to track deductions, but if your business is ever
audited by the IRS, mixed-up financials will cast a
doubt on any business deductions you make that
are actually legitimate.
Make taxes as easy as possible for yourself. When
you have a separate bank account and a card
you use only for your freelance expenses, your
business expenses are clearly separated from
your personal expenses by default.
2 - Track internal financial data
Freelance businesses have a lot of moving
parts. A separate business bank account makes
it simpler for you to track your income and
expenses. When you or a bookkeeper review
your finances, you will be able to analyze
accurate, up-to-date numbers and gain a clear
understanding of your business’ financial health.
COURSE 3 FINANCES AS A FREELANCER
MANAGING A GIGGIN’ BUSINESS BUNDLE
3 - Create a business history
When you open a separate business bank
account, you are starting a financial history unique
to your business. If you ever want to obtain a
loan or other form of financing for your business,
lenders and investors will want to review an
established, healthy financial history.
Establishing a lending relationship with a bank,
even if that’s just opening up a line of credit
with a business credit card, plants the seed of a
financial history for your business. If you are able
to consistently pay your bills on time and run
transactions through your business account, it will
reflect well on your business in the eyes of a small
business lending agent at a bank or the Small
Business Association (SBA).
Recent events with COVID-19 stimulus funds and
the CARES Act showed that having a relationship
with small business lenders, like banks, can
be an investment that pays off in unexpected
circumstances.
4 - Build savings into your business
While you may have a plan for your personal
savings, a separate business bank account allows
you to build savings that are unique to your
business expenses.
For example, setting aside a portion of your
income into a dedicated savings account
can help you prepare for your independent
contractor quarterly estimated tax payments
(covered in the next Lesson). Or, since safety nets
like Unemployment Insurance typically exclude
freelancers, you can create a savings account that
covers a few months of operational expenses
and income in the case of unexpected dips in
business.
Although thinking about savings may be
intimidating if you’re just beginning or barely
breaking even, savings are a good thing to build
into your business as you grow. Many banks offer
competitive interest rates CREA accounts
NTfor savings
TErecurring
and make it easyOtoNset TO that
deposits
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 YOUR FREELANCE BANKING AND BOOKKEEPING
Who should be creating
a business bank
account?
If you are earning freelance income, you should
be keeping your business finances separate. This
is true whether you set up an LLC, stayed a sole
proprietor, work part-time or full-time, or are in
a partnership. If your freelance business is just a
side hustle for right now, we still encourage you
to set up your finances. You never know where
life will take you.
If you have not yet signed up for an Employer
Identification Number (EIN) with the IRS, now is
the time. Many states and banks will require an
EIN to set up a business bank account, and the
IRS’ online application process is simple and free.
COURSE 3 FINANCES AS A FREELANCER
MANAGING A GIGGIN’ BUSINESS BUNDLE
Creating a bookkeeping
system
Once you have set up your business bank
account, you will be able to set up basic
bookkeeping systems that can both streamline
your tax calculations and keep you informed
about business operations. Depending on your
business complexity and what functionality you’re
looking for, your “books” can range from Excel
sheets to bookkeeping platforms (like FreshBooks,
QuickBooks, Xero, and Wave, to name a few).
Your bookkeeping system should eventually track
metrics such as:
X Gross revenue
X B
 usiness expenses (including by deduction
category)
X Net income (Revenue - Expenses)
X Your salary
Analyzing your finances is something we’ll cover
in our last Lesson of this Course, but setting these
systems up will be fundamental–you cannot
analyze your finances if you don’t have finances
to track. Once you have your bookkeeping set
up, you will be able to focus on improving your
finances, addressing trends like income volatility
or working to drive up your revenue and reduce
your expenses.
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 YOUR FREELANCE BANKING AND BOOKKEEPING

Conclusion
Once you’ve created a foundation for your
finances, you are ready to tackle the next big
challenge: taxes. We’ll dive into this area in our
next Lesson, and when you sit down with your
taxes, we guarantee you’ll be glad you set up
your freelancer finances!

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COURSE 3 FINANCES AS A FREELANCER

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 Your Freelance Tax Strategy
Introduction What’s the difference
Benjamin Franklin is commonly credited with the between a contractor
wry observation, “In this world nothing can be
said to be certain, except death and taxes.”
and an employee?
An employee and an independent contractor
The reality is whether you’re ready or not, taxes
might sometimes do similar work, but they are
will always be ready for you. If you fail to comply
seen differently in terms of taxes.
with tax codes or file your taxes incorrectly, you
are leaving yourself and your business liable for For an employee, whether they are part-time
penalties. or full-time, a company withholds employment
taxes (income and payroll tax) from wages. For an
This Lesson will cover basic freelancer tax
independent contractor, the company does not
information. Especially if you’ve always worked
withhold taxes, and the contractor is responsible
as an employee for a company, the world of
for all tax burdens.
freelancer taxes can seem confusing at first.
If you are an independent contractor, also known
Tax laws do vary by state and are subject to
as a freelancer or self-employed worker, you
frequent changes. The basics covered in this
are responsible for paying all your own self-
Lesson will help you start to speak the language
employment taxes. The tax rate is the same for
of freelance taxes, but when it comes to doing
all contractors, whether you have an LLC or sole
your own taxes, you may need to do more
proprietorship.
research on your own or talk to a tax professional.
While it is possible for a single-member LLC to
elect to be taxed as a different business entity
(called an S-corp), that is a more complex tax
setup not common for beginner freelancers, and
it is beyond the scope of this Lesson.

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COURSE 3 FINANCES AS A FREELANCER

MANAGING A GIGGIN’ BUSINESS BUNDLE
 YOUR FREELANCE TAX STRATEGY
What are employment
taxes?
Employment taxes are made up of payroll tax
and income tax, and the burden of these taxes is
different between employees and contractors.
Payroll tax includes the taxes that fund Social
Security and Medicare (also known as FICA taxes).
If you are an employee, your employer will
pay half of your payroll taxes and automatically
withhold your half of the payroll taxes from your
wage before you receive your paycheck.
Income tax includes federal, state, and local
income taxes. Federal income tax is based
on income categories set by the federal
government, and state and local income taxes
vary depending on where you live. Income tax
is entirely the responsibility of the individual.
However, just like FICA taxes, for employees,
income tax is automatically withheld from your
wages before you receive your paycheck.
Independent contractors have neither payroll nor
income taxes automatically withheld from their
income. As a freelancer, you need to pay both the
employee and employer part of Social Security
and Medicare taxes, PLUS your income taxes, all
at the same time.
While the difference may sound small, many
freelancers are shocked by their first tax bill.
Especially if you are used to taxes automatically
being withheld from your paycheck as an
employee, the freelance tax rate that can add
up to 25-30% of your income can seem quite
steep. You may want to consider consulting a tax
professional as early in your freelance business
as possible so that you are prepared for what to
expect.
COURSE 3 FINANCES AS A FREELANCER
MANAGING A GIGGIN’ BUSINESS BUNDLE
Common freelance tax
forms
When you file your taxes, you will probably use
forms like Form 1040 or a Schedule C. However,
before you even file your taxes, you will
encounter a couple other common freelance tax
forms.
If you were previously employed, you may
remember that employees fill out a W-4 when
starting with a company and receive a W-2 from
their employer showing their annual income. For
freelancers, the two equivalent tax forms are:
W-9
Your client may ask you to fill out a W-9 form
when you take contract work, which requires
basic information like your name, address, and
Social Security Number (SSN) or Employer
Identification Number (EIN).
1099-MISC
Current IRS guidelines require a business to send
you a 1099-MISC form (or 1099 for short) before
the tax filing deadline if they paid you more than
$600 in a year. The 1099 form simply summarizes
what a client paid you, tracking the independent
contractor income on which you will pay taxes.
In theory, you will receive 1099s from any client
who paid you more than $600 in a given year.
However, if you did small jobs under $600, or if
you do not receive a 1099 form from a forgetful
client, you are still required to report that income.
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 YOUR FREELANCE TAX STRATEGY
Common freelance
deductions
When you are a freelancer, deductions are
your friend. Claiming all of your allowable
business expense deductions can help offset the
substantial independent contractor tax rate. To
give you an idea of common business deductions
for freelancers, here is a non-exhaustive list:
X A
 dvertising expenses like business cards or
website subscriptions
X Paying for coffee for a client
X Bank fees on your business bank account
X Office supplies like printer ink, pens, and paper
X A portion of your rent (if you work from home)
X S
 ubscription to a magazine relevant to your
industry
Business deductions can be a fine line for
freelancers to walk, which unfortunately means
freelance taxes are frequently scrutinized more
thoroughly than average. Ensure that you keep
records and receipts in case you are audited, and
consider taking advantage of apps or document
management tools that can help you properly
document your legitimate business expenses.
Quarterly estimated
tax payments
Remember how an employee of a company
would get their taxes automatically withheld from
their paycheck? Quarterly estimated taxes are the
equivalent mechanism for a freelancer, and they
are required if you do not have withholding tax
taken out of your income.
The general guideline for freelancers is if you
expect to owe taxes of $1,000 or more when
you file your return, your business should make
estimated tax payments. The IRS does not want
you to pay all of your taxes in a giant lump sum
at the end of the year. While it is rare, you can
be charged a penalty by the IRS if you didn’t pay
enough tax from either withholding or estimated
tax payments.
COURSE 3 FINANCES AS A FREELANCER
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Quarterly taxes are due four times a year: April 15,
June 15, September 15, and January 15 (of the next
year).
To figure out your estimated taxes, you can take
your income, deductions, and credits from the
prior year and calculate your payments using the
worksheet on the IRS form 1040-ES. If it’s your
first year earning freelance income and paying
quarterly taxes, you may be able to calculate
rough estimates or wait until the following year
to start making quarterly payments. For many
new freelancers, it is a good idea to talk to a tax
specialist before making a decision and sending
away too much money, or too little.
Filing your tax return
When it’s finally time to file your tax return, the first
step is to get organized. If you separated your
business financials, you should have itemized
records of your earnings and expenses.
When you file your taxes, depending on your
situation, you may use just Form 1040 or add on a
Schedule C. This is where you will catalogue and
calculate your income and deductions.
While some freelancers prefer to do their own
taxes, consider using a tax expert who has
experience helping freelancers. Why?
X A
 professional can help reduce the amount of
time you spend on your taxes.
X A
 return prepared by a bookkeeper or
accountant will make your return less
susceptible to an audit. If you are audited
anyway, you will be in a better position to
comply.
X T
 he tax rate for independent contract income
is quite high, and a tax specialist can help you
get the maximum deductions possible.
X P
 aying for an accountant to file your taxes is a
business expense… so it can be deducted the
next year!
X A
 s you grow your business, an accountant
C EA based on
TENT(likeRthe
can also recommend tax strategies
N
your business financials TO filing
S-Corp
CO RS
mentioned earlier).
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 YOUR FREELANCE TAX STRATEGY

Conclusion
Proactively learning about the wild world of
freelancer taxes will benefit you in the short
and long-term. Taxes will always be a part of
your business, and especially as you grow your
business income—the subject of our next Lesson.

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 Negotiating Your Rate, Terms,
and Project Scope
Introduction
Many creatives find that while they could talk
about their craft for days, talking to clients about
budgets and payments is a more uncomfortable
topic. As a business owner, open communication
about finances will be critical to your success, but
we understand that financial discussions might
sometimes feel outside of your comfort zone.

Establishing clear expectations about finances

from the beginning of a project helps you avoid
potential conflicts later on. Part of maintaining
good relationships with your clients relies on
setting clear financial expectations through frank
discussions, and putting these agreements on
paper with a contract.

When discussing finances, you should, at the very

least, cover three main areas for every project
contract: rate, scope, and payment terms.

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 NEGOTIATING YOUR RATE, TERMS, AND PROJECT SCOPE
What is your rate?
Deciding what to charge can seem like an open-
ended question when you first begin to freelance.
Your rate will shift over time as you learn more
about your industry and your business model
evolves.
Pricing starts with your most valuable resource:
time. No matter what model you use for pricing,
you have a limited number of hours in a week to
work. You need to earn enough per hour to make
a profit.
There are two principal approaches:
Hourly Rate
Hourly rates are common in the freelance world
but may vary between projects. A client may ask
you to:
X C
 omplete a project, and charge the hours
afterward.
X Estimate hours up-front for budgeting.
X P
 rovide a prepaid block of time they’ll apply to
different projects.
X R
 etain you for a set period of time, paying you
in advance for your services.
Whichever scenario, setting your hourly rate is
dependent on how much money you need to
earn per hour spent on freelance work to make a
profit.
Value-Based Rate
A value-based rate, also called “project pricing,”
involves basing your rate on the value your work
provides to a client. It isn’t strictly based on time,
rather, it’s a jointly agreed price that matches the
client’s perceived value of your service.
Many clients prefer flat, value-based rates,
because they can budget better knowing the
cost in advance.
On your end, you may be able to streamline tasks
while holding the value-based rate steady, which
will effectively raise your hourly rate. However, if
COURSE 3 FINANCES AS A FREELANCER
MANAGING A GIGGIN’ BUSINESS BUNDLE
you don’t accurately predict how long the project
will take, or allow the scope to change in the
middle of the project, your profitability can go
out the window.
As a general rule, if the project is well-defined,
value-based pricing is a great fit. If you aren’t sure
about how long a project will take, or the scope
might evolve over time, it is a good idea to quote
hourly.
How to negotiate rates with clients
In general, most beginning freelancers tend to
undervalue their services. Don’t forget—you aren’t
just providing a freelance service, you are running
a business that has expenses. When you charge
for that hour of freelance work, that rate should
cover not only your services, but also expenses
like website hosting, networking association dues,
and bookkeeper’s fees.
Like any other business, you incorporate your
overhead into your prices.
Negotiating your rate can feel intimidating, but
don’t tell yourself “No” before you give the client
a chance to say “Yes”.
When it comes to rate, everything is negotiable.
If you try a certain rate and get a no, you can
always go lower, but you may be surprised at
how many clients don’t blink an eye at a higher
rate. If you demonstrate the value of your work,
many clients will make room for you in their
budget.
Before walking into a discussion about rates, write
down your “walk-away rate,” the lowest you will
go.
If a client insists on a rate that’s not worth your
time and effort, you can maintain the relationship
by politely declining while acknowledging
their needs, using a phrase like, “I completely
understand that every business has its own
budget, but I don’t think I can make that work.
However, I know another freelancer I could refer.”
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 NEGOTIATING YOUR RATE, TERMS, AND PROJECT SCOPE
What’s the project
scope?
A project scope is what you are delivering,
including documents, assets, communication,
expectations, and deadlines. With many projects,
you need to consider not just the rate, but the
scope of the project for that rate.
Even for hourly work, it is essential to discuss
project scope at the same time as project rate.
Clear communication about project scope will
help ensure a client is satisfied with what you
accomplish and preserve your hourly profitability.
Because scope and rate are interrelated, you can
negotiate scope in place of rate. If a client has a
set budget that doesn’t match your rate, consider
changing project scope to match their budget.
Phrases like, “If you have a set budget, I’m happy
to work with you to create a matching proposal,”
can protect the relationship and your profitability.
Your project scope should be clearly outlined
and agreed upon by you and your client before
you start working. If there are any changes to
your scope throughout the project, add contract
addendums that reflect the new scope in writing.
COURSE 3 FINANCES AS A FREELANCER
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What are the payment
terms?
Finally, after rate and scope, negotiate payment
terms up front. Consider the following:
Payment Due Date
There are many different possible timelines
for payment, and you will need to negotiate
individually with clients. Some clients may prefer
to pay their bills right away, while others may
have set payment dates for vendors. Common
payment due dates include:
X D
 ue on receipt (due when client receives
invoice)
X N
 et 15, 30, etc (payment is due 15 or 30
calendar days after receiving your invoice)
Late payments happen, and we’ll go over your
options for that in the next lesson.
Payment Types
Do you accept direct deposit only? What about
paper checks in the mail? Digital payment apps?
Knowing which payment types work with your
cash flow informs your discussions with clients.
Billing Options
Especially if you are working on large contracts,
down payments, deposits, or partial payments
for projects are possible. If you had a large,
multi-month project, for example, you can ask for
1/3 up front, 1/3 halfway through, and 1/3 at the
end. Asking for a deposit up front, or payment in
installments throughout a project, can smooth out
your cash flow and remove some risk of a client
nonpayment.
Cancellation Clauses
Your payment terms should include cancellation
clauses in case either you or the client terminates
the contract. Cancellation clauses that include a
certain number of days advance notice protect
you from sudden drops in revenue and protect
N TENT Closing
your client from unexpectedly REATservices.
OR that
Your cancellationOclause should also ensure
C S
you are paid for work you have already completed
G
if a project is cancelled before completion.
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 NEGOTIATING YOUR RATE, TERMS, AND PROJECT SCOPE

Conclusion
Once you’ve settled the project financial terms
with a client, it’s time for the last step in the project
cycle: getting paid. We’ll discuss invoicing and
ensuring payment in the next lesson.

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 Sending and Tracking
Invoices
Introduction
If you ever worked as an employee, you probably
got a regular paycheck every week or two. Your
employer regularly ran payroll, ensured it was
deposited in your bank account, and took care of
the logistics.

Now that you are in charge of your own business,

you are responsible for ensuring you get paid
from your invoices. For many contractors, this can
be a time-consuming, often frustrating process.
If you have many different clients, depending on
their response time and organization, sending,
tracking, and hunting down invoices can feel like
a Sisyphean task.

Unfortunately, for many freelancers, getting paid

on time is not the default. Timely payment is most
likely to occur if you are organized and have the
proper systems in place.

To minimize the amount of time you spend on

invoicing and getting paid, it pays to establish a
consistent billing process. Your invoicing system
should include a clear, readable invoice template
that allows you to get paid easily, and a method
to track your invoices in progress.

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COURSE 3 FINANCES AS A FREELANCER

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 NEGOTIATING YOUR RATE, TERMS, AND PROJECT SCOPE

What to include in an invoice?

You can’t control what is happening within your
client’s business. If your client is an overworked
small business owner, or a company’s Accounts
Payable department isn’t organized, you may
experience delays in processing your invoice.
However, one thing definitely lies under your
control: how clear your invoice is.
A succinct, clear invoice makes it effortless for
your clients to pay you. The easier it is for them
to process your invoice, the more likely you will
get paid on time, without hassle. Focus on invoice
details such as:
Accurate, complete information
Send your invoices on time, with correct billing
totals. Include your full contact information,
payment details, and anything else they need to
know to process your invoice. If there’s a mistake
in your invoice total, or your bank routing number,
this small detail can delay or pause payment.
Detail what you’re billing
The most fundamental role of an invoice is to
inform your clients what you are billing them for.
If the breakdown of your work is not clear on the
invoice, you may run the risk of a client thinking
you made a mistake on the bill, or worse, your
services aren’t worth it. Essentially, your invoice
should mirror your project proposal and contract,
making it crystal-clear what services were
provided.
Choose your due dates intentionally
When choosing your payment due dates, balance
your needs and your client’s needs. Your client
may be a small business owner who requires
a few reminders before they send out a check,
or the accounting department may only pay
vendors on certain days. While you may prefer
quick payments for your cash flow, giving clients
an adequate amount of time to make a payment
helps maintain the relationship.
Make payment easy
Can you include links to payment portals? Is your
banking information clearly marked? Do you
offer different payment options that fit the way
your clients operate? Make paying your invoice
as easy as possible for your clients, and you’ll
remove barriers for them to process your invoice.
Brand your invoice
Branding your invoice with your logo and a
personalized message makes it memorable. Not
only does this help improve your reputation as a
professional, trusted business, it might make your
invoice stand out and get paid more quickly.

It’s best not to bill in a lump sum, even if you are

charging a flat fee. If the project was complex,
break down the steps. Label and organize the
hours you spent on which part of the process.
Showcase the amount of work you did, using this
opportunity to further reinforce the value of your
services to the client.

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 NEGOTIATING YOUR RATE, TERMS, AND PROJECT SCOPE
Tracking Invoices
A company would have an “Accounts Receivable”
department to track the outstanding invoices that
have not been paid. As a freelancer, you rely on
yourself to get the job done.
If you’re having trouble keeping up with your
invoices, it’s not necessarily a bad problem to
have! It means you’re doing a lot of business. To
minimize the time you spend on tracking invoices,
level-up your billing by using invoicing platforms
such as QuickBooks or bill.com to automate and
connect elements of the invoicing process.
Set up a system for following up on late or unpaid
invoices. Keep a record of payment-related
communications, in case any questions come up
later.
Whatever invoice system you use, your system
should cover at least the following steps:
1. Creating an invoice
2. Sending an invoice
3. Tracking payment due date
4. Receiving payment for an invoice
5. Following up on late payments
Late or Non Payment
for Invoices
No freelancer wants to be put in a situation of late
or nonpayment, and most of your clients don’t
want to do that to you either. However, especially
because labor law protections for independent
contractors are thin in many states, it’s good to be
prepared for the worst-case scenario.
A client’s delayed payment puts you in a touchy
situation. Maintaining your good relationship with
a client may require you to offer an occasional
grace period. If a client is having cash flow issues,
consider setting up a payment plan that allows
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them to chip away at their balance. Most of the
time, clients simply need you to reach out and
remind them about payment.
If you’re worried about your own cash flow, don’t
be afraid to set up a system to nudge clients. For
clients who habitually pay late, consider invoking
a type of “late fee” in your payment terms
(mentioned in the last lesson). You may be able
to apply a low interest rate, or flat fee, to invoices
that are not paid according to agreed-upon
terms. This option is only viable if you have a
robust, effective contract in place, but it can help
encourage clients to pay you in full, on time.
However,some businesses may intentionally
take advantage of freelancers and leave invoices
unpaid. States like New York have enacted
legislation like the “Freelance Isn’t Free” Act, which
protects freelancers from nonpayment with
enforceable 30-day payment terms, mandatory
contracts, and payment agreement protections.
Unfortunately, protections for freelancers vary
widely by state, and your options may be
limited in some places. If your state doesn’t offer
adequate labor laws for independent contractors,
you have other options to fight back against
nonpayment. You may be able to:
X Send formal collections notices.
X Threaten to pursue legal action.
X G
 o to your local city or state small claims
court.
We certainly hope you never experience client
nonpayment. These last-resort strategies are not
ideal, and legal action may require time, energy,
and resources. To avoid undesirable situations
like this, your best bet is to prioritize working with
reputable companies and entering projects with
ironclad contracts.
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 NEGOTIATING YOUR RATE, TERMS, AND PROJECT SCOPE

Conclusion
When your invoicing system is well-organized,
your business cash flow and financials can run
like a well-oiled machine. In the next lesson, we’ll
explore how to analyze your finances and create
financial projections that will help you steer your
business.

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 Your Financial Projections
and Planning
Introduction
It’s hard to predict what the future holds for
your business. Large companies have entire
departments responsible for creating forecasts
and developing budgets. For freelance
businesses, until someone invents a reliable
magic eight ball for business development, you
are usually responsible for understanding and
forecasting your own finances.

In particular, information about your cash flow

provides the foundation for realizing your
financial goals. When you manage your cash flow,
you reduce volatility in your revenue, ensure you
are paying yourself what you need, and open up
new opportunities for business growth.

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 YOUR FINANCIAL PROJECTIONS AND PLANNING

Mastering your Cash

Flow
Unlike an employee, as an independent
contractor, you don’t have a guaranteed
paycheck every few weeks. You take on the
risk of swings in income that come with your
business. Many freelance businesses experience
a kind of “feast or famine” cycle, with one overly-
busy period being followed by a slow period.

Some of this volatility is inherent in a business

model built on different projects and clients.
However, understanding how to manage your
cash flow can help you stabilize the factors that
are within your control.

Managing your cash flow entails:

X S
 moothing out the fluctuations in your revenue
and profit
X Forecasting your income and expenses
X Having a backup plan for dips in income

All businesses have budgets, and yours should

be no exception. Armed with an understanding
of your current cash flow and your cash flow
forecasts, you can make more informed decisions
that will affect how you fare during any revenue
fluctuations, as well as your ultimate profitability.

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 YOUR FINANCIAL PROJECTIONS AND PLANNING
Your Cash Flow Statement
Your cash flow statement is a summary of how
much money your business made and how much
money your business spent over a period of time,
usually monthly. It represents the state of your
business in the moment.
For your freelance business, you can keep your
cash flow analysis simple, using the following
formula for a set period of time (like a month or
quarter):
Total Cash Inflow - Total Cash Outflow = Net
Cash Flow
If your Net Cash Flow is zero, with revenues and
expenses matching, your business has reached
a “break-even point”. When “cash in” increases
beyond that point and you have a positive
number, you have reached profitability.
Let’s go over each term in detail:
Total Cash Inflow = Gross Revenue
Revenue is the income you bring into the
business. This is separate from profit, as we’ll
discuss below. Especially if you are still building
your business, this number may fluctuate over
time.
When tracking your revenue, you can analyze
numbers on the granular level, tracking volatility
month-to-month. You can also zoom out for
a long-term view, tracking annual or quarterly
averages.
Total Cash Outflow = Expenses
Your expenses, otherwise known as overhead,
are the cost of doing business. These expenses
may include your monthly payroll (for yourself
and any contractors), rent, utilities, equipment,
and any other purchases you must make to
provide your service. In many cases, expenses
will fluctuate less month-to-month than your
constantly-changing revenues.
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If you are a small, mostly one-person freelance
business, it may be helpful to track your total
expenses for both your business and your
personal accounts. Making a spreadsheet of your
total expenses can help you track your cost of
living, which will factor into how much you pay
yourself from your business.
In addition to your monthly expenses,
include larger annual items like tax payments,
membership dues, and any software or tech
subscriptions. You can total these larger expenses,
divide by 12 months, and add the average to your
monthly expenses, so that these items don’t sneak
up on you and skew your monthly budget (this
approach crosses over into an accrual method of
accounting, rather than strict cash basis).
Net Cash Flow = Profitability
Your profit is what’s left over from your revenue
after you pay taxes and business expenses. (Of
course, “profit” assumes your net cash flow is
positive. If your net cash flow is negative, this
number represents your business losses).
Although many confuse profit and revenue, profit
is something that is more within your control than
revenue. Consider this example: during a typical
month, you spontaneously decide to splurge on
a new, top-of-the-line laptop for your business.
For this month, your revenue didn’t go down, but
your profitability did.
Many freelancers operate by only paying
themselves from profit, which may be your model
if you aren’t planning on scaling your business.
However, if you consider whatever you pay
yourself as an expense, accounting for it before
you calculate your profitability, this can help
you build a foundation for scaling. You can then
choose what you want to do with your profit:
pocket it, invest it, or save it for the future.
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 YOUR FINANCIAL PROJECTIONS AND PLANNING
Cash Flow Forecasting
Once you know more about your cash flow,
you can use that information to make cash flow
forecasts, projecting your future income. Forecasts
can sometimes seem like part science, part art,
but the basic purpose is to link your future income
projections to your known expenses. These
projections can be a helpful planning tool to
address fluctuating freelance income.
You can use the following formula for calculate
your cash flow forecast for a certain period of
time (monthly, quarterly, or annually):
Cash Flow Forecast = Beginning Cash +
Projected Inflows – Projected Outflows =
Ending Cash
Your Beginning Cash is how much money you
have at the start of this specific time period (and
is equal to your Ending Cash from the previous
time period). Your Projected Outflows are what
you project your known expenses to total. Your
Projected Inflows are the revenue you expect to
make from your clients every month.
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Setting Financial Goals
Once you have all of the financial pieces you
need, you can start to make fiscal projections
for 3, 6, and 12 months in the future. Dividing a
year into smaller chunks of time, especially at the
beginning of your freelance business, helps you
create more realistic, reachable goals.
Use the SMART method to set goals that measure
your business development. This will allow you to
keep track of the short- and long-term trends, so
you can intervene if needed in different areas.
The SMART technique for goal setting states that
in order to be effective, goals should be:
X Specific
X Measurable
X Achievable
X Relevant
X Timely
However, remember that your monthly values
may appear skewed if you are going through
feast-or-famine revenue cycles, so it can be
helpful to look at your annual picture as well.
Ultimately, your goal is to reduce volatility and
grow your business.
When you forecast your inflows, or revenue,
consider making two different projections: one
that is conservative and reflects an average
outcome, and one that is bold and reflects best-
case scenarios. If you are putting a lot of effort
into your business development, you may be
surprised at which numbers you are able to hit!
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 YOUR FINANCIAL PROJECTIONS AND PLANNING

Planning Cash Flow

When you have a handle on your cash flow, you
are able to plan better for your business, in areas
such as:

Salary
As soon as you are able, paying yourself a regular
salary (in monthly or weekly payments) can
make your cash flow more predictable. Whether
you are struggling to manage your cash flow or
experiencing stability, knowing what you need to
pay yourself each month helps ensure you have
enough for personal bills without overdrawing
from your business.

Savings
We’ve already mentioned that savings are critical
for a freelancer. Having some emergency savings
set aside for when a client is late on payment,
or you experience an unexpected change in
revenue, serves as a financial safety net. You can
even set up savings for other, happier reasons,
like taking a vacation!

If your work is seasonally-sensitive, like a wedding

videographer who is especially busy in the
summer, savings may also help you budget
enough to pay yourself during the lean, non-peak
times of year.

Reinvestment in Business
Setting aside a percentage of your profit to invest
in professional services, certification courses,
technology, or any other number of business
development opportunities can be a smart
growth strategy and fuel for raising your rates.
Prioritizing reinvestment early on in your business
can pay dividends in the future.

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 YOUR FINANCIAL PROJECTIONS AND PLANNING

Conclusion
We know, finances aren’t always the most
exciting part about freelancing. However,
without an understanding of this part of your
business, any move you make will always be on
uncertain footing. With your financial history and
forecasting at your side, you’re ready to face
whatever is coming next.

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