How can freelancers better manage their finances?
What is one of the most common reasons why a freelance operation may fail? While many factors need to be taken into account, a lack of financial oversight and clarity can represent a fatal situation. What options do entrepreneurs have at their disposal? How can they better manage their money and are there any software suites which can be useful? It is important to take a look at these and other fiscal questions.
Financial management 101: appreciating the basics
As financial services related to the business community may appear confusing to some, it is wise to break this concept down into a handful of easily digestible categories. First and foremost, finance involves much more than how much revenue a firm generates during a specific period of time. It depends upon other core variables such as:
- The ratio between profit and loss
- Effectively monitoring bankrolls
- Predicting future expenditures
- Appreciating other ways to generate a sustainable source of income
The proper level of financial oversight will therefore only be obtained after freelancers learn to understand the role of these factors in terms of the “bigger picture”. Now that some of the broad strokes have been highlighted, it is wise to examine some other concepts in greater detail; particularly the financial tools and approaches that are relevant within the freelance community.
The bottom-up approach to managing finance
One common error is to focus too much upon the so-called financial “bottom line” of a business. In other words, owners tend to believe that levels of profit and loss are the sole indicators of how an enterprise may be performing. While there is no doubt that these factors provide a general overview, they offer little insight in regards to specific variables that might be impacting the efficacy of a freelance business.
For example, a company may be turning a large profit while shouldering massive amounts of debt to one or more banks. Or, a rise in sales during a seasonal period could overshadow the fact that the organisation in question is constantly operating at a loss. Other common situations include a failure to pay the appropriate amount of taxes, increased operational costs and negative cash flow.
The situations mentioned above illustrate why it is critical for freelancers to look at the finer points as opposed to the big picture alone. This will provide them with an actionable level of insight when the time is right.
Investment opportunities for freelancers
It would be fruitless to address the concept of business finance without delving into a handful of ways in which extra capital can be injected into ongoing operations. While applying for a small business loan through a bank is a possibility, this might not always be plausible (particularly if the freelancer is currently making payments on an existing scheme). This is when it is wise to look at investment opportunities.
While such ventures will provide an extra source of money, it should be mentioned that any associated risks need to be mitigated as much as possible. This is especially relevant when speaking of more liquid positions such as spread bets and Forex pairs. While such asset classes are liquid, they are also volatile. Thus, freelancers should instead focus upon financing options that provide a predictable source of income over time. Examples include:
- Index-traded funds
- Treasuries
- Government bonds
- Long-term commodities
The notion of finance in relation to investing should always be approached with prudence and as a rule of thumb, no more than ten per cent of one’s total working capital should ever be tied up for any given period of time.
Government subsidies and loans
There are many government resources available which have been specifically designed to provide freelancers and similar entrepreneurs with an additional source of cash. Such lending systems are often associated with lower interest rates and more amenable payment plans; both excellent benefits for those who need to secure a liquid source of funding. Having said this, not all individuals will qualify for this finance option. This is why it is wise to speak with a financial adviser in order to learn which programs are the most appropriate.
Debt management and business finance
Money management will often involve dealing with debt. In fact, the majority of entrepreneurs and freelancers tend to owe money to one or more lenders. This is a perfectly normal situation and yet, it is critical that all obligations are met. Should late payments or defaults take place, it will be nearly impossible to secure additional financing and funds in the future. This is also the very same reason why lenders should only be chosen if their repayment options are fiscally realistic.
Digital finance solutions: are they worth it?
There are many online software packages centred around the world of small business finance. However, not all live up to their promises. Others might require freelancers to pay a significant amount of money in order to access the associated tools. This is why a good amount of research should be performed in advance. Some hallmarks associated with a solid finance platform include:
- Numerous customisation options
- A user-friendly layout
- The ability to automatically calculate tax rates
- Full integration with an existing bank or financial institution
The concept of business finance does not necessarily have to represent an insurmountable hurdle. However, freelancers still need to be prepared for how financial decisions today will impact their venture into the future. The good news is that there are numerous utilities and tools which will provide amazing levels of clarity and insight. Transparent levels of business finance will always equate to long-term success.