As freelancers, we’re masters at our own crafts. We’ve worked or faced work as employees, only to realise there are better ways of managing time, satisfying clients, and building a legacy. But when we go out on our own, we realise all the other things that are needed to run a freelance business… the operations, marketing, customer service, sales, and business development, all aspects of running a business that keep us away from the work we want to do.
It’s all rock and roll as the invoices are coming in. Seeing £1,000 land in the bank overnight is the best kind of morning fuel. But it took me nearly seven years to realise that the £1,000 wasn’t all mine – and although the creative in me avoids math at all costs, it was time to pull out some old ratio calculations to clean up my finances.
If you’ve ever seen a tax bill and sent desperate emails trying to drum up work or scrounged from every account just to pay a monthly expense, this article is for you.
Take the emotion out of it because, no, you’re not a failure. Money is just a tool, after all. Give each dollar a job to do.
Split your personal and business finances
Right now, you probably use one bank, with maybe a couple of accounts. Spend some time researching a second bank so you can split up your personal and business money. On the business side, keep one account for all your money to land into, then create separate accounts (‘buckets’) for your money. I have three accounts: Operational Expenses, Tax and Wages. Every time an invoice is paid, I divvy up the amount to my various buckets in the business bank.
30/30/30 + margin
Get ready for a perspective upgrade. Mike Michalowicz, the author of Profit First, determines the 30/30/30 split as a healthy company. This means 30% operational expenses (OpEx) 30% tax, and 30% wages, with 10% in margin to invest into income-creating assets (like a new website, book publishing, physical products or designing a course).
Your ratios might currently look like 50% wages, 20% OpEx and 30% tax, it’s important to work towards the 30/30/30. To work out your ratios, first you need to define your ideal income.
Let your lifestyle define your ‘wage’
What is your ideal lifestyle? Think about all the things that make your life exciting… travel, clothing, books, holidays, yoga, a gym membership, buying organic food, etc. Work out a number that you need to make in order to do all the things you love, pay your (personal) bills, and save. Let’s say it’s £16,000 per year. Great. This is essentially your wage goal.
Work out your ratios (and revisit)
So, if your wage £16,000 (plus 4% for retirement), this comes to £16,640. For this to make up 30% of your yearly income, you need to generate £55,000.
30% wages = £16,500
30% tax = £16,500
30% OpEx = £16,500
10% margin = £5,500
To define your hourly rate, let’s say you work 30 hours a week (1,560 hours a year). That comes to £36/hour. If your operational expenses or tax doesn’t come to 30%, you’ll have extra cash in the bank that is essentially extra margin. Overtime, this will compound, and you can grow it into a business emergency fund, which will cover 6-12 months of wages, OpEx, and tax (in case you want to switch gears in your business, take time off to have a baby or, you know, there’s a global pandemic).
Once you start thinking in ratios, it’s easier to estimate projects, forecast cashflow, and plan your year. The 30/30/30 income split covers your dream wage (including retirement), tax requirements, business expenses, and factors in a 10% margin.
As for your personal bank accounts, I suggest having multiple ‘buckets’, too – one for expenses/bills, savings, and splurging.
Build assets with your margin
Have you always wanted to write a book, but don’t have the extra money? Do you want to revamp your website? Create a cool little physical pack to send to new clients and prospects? With your new margin (10%) built into your rate, now you can. If we use the example calculations above, make sure you include 10% in margin per year to do with it as you will.
Use this margin to re-invest back into projects that’ll grow your freelance business (and make you more money). This way, you don’t have to pull money from your wage or worse, one of your personal accounts, to grow.
Remember, give every pound a job to do.
Think like a business owner
It’s difficult to compartmentalise our finances as freelancers, when we are the business. But if you can spend the next three months following this advice, you’ll start behaving like a business owner, not a freelancer. 30% of every dollar goes to the tax man, 30% to operational expenses, 30% to your wage, and 10% to margin. Give it a few months and feel the momentum of your money working for you. Revisit your ratios every so often, especially if you want to increase your wage or invest in a contractor.
Managing money doesn’t need to be disempowering. You don’t have to be ‘good with numbers’ to master cashflow. Dedicate one hour at the end of every month to check your finances, business and personal. Follow your ratios and don’t overcomplicate it.
One thing’s for sure: your accountant’s going to love you.