The Four Business Basics Every Freelancer Should Know
Let me get one thing straight from the start: I’m an audiobook narrator, not an accountant. However, as an audiobook narrator (and actor, director, writer, etc, to the many different hats I wear on any given day), I am decidedly a freelancer. While those of us that currently freelance are certainly familiar with the concept that being a freelancer also means that we’re a business owner, that doesn’t necessarily mean that we actually understand what that means.
I know I certainly didn’t.
A little over a year ago, it finally clicked and sent me down a path to learn as much as I could about running a business, even to the point of toying with the idea of getting an MBA. I’m still toying with that idea, but for now, I’m content scouring the internet for the best resources out there in learning the basics of running a company.
On this journey, there were a few ideas and concepts that immediately opened my eyes — and transformed how I started conducting my business. With any luck, a few of these will open your eyes, too.
Your Hourly Rate Covers Everything
Calculate what you earn per hour. That’s it. That’s the tip. And I don’t mean calculate the rate you charge your clients, calculate what you actually earn for every hour you put into the business.
It sounds silly, and it sounds simple, and in some sense, it sounds a little counter to what the idealists are striving for in the life of a freelancer, but it is so vitally important as a benchmark for understanding where your business stands. If you are currently working a more traditional job, how can you compare your freelance business to that job without understanding on an hourly basis what you’re making?
Beyond that, the act of calculating your hourly rate keeps you accountable for tracking the actual number of hours that you are working on the business. This includes website maintenance, lead generation, all of the little tasks that go into operating a business that there isn’t a client directly paying you to complete. Time isn’t the only cost, however. Depending on your particular line of work, there are other costs associated with operating your business, and these should be included in your calculation of what you earn per hour.
The question often gets asked about when the time is right to give full time freelancing a go and leave behind traditional employment. There is no single answer that is correct for everyone, but understanding how much money you’re making per hour spent in each scenario is certainly a key part of that calculation. It’s also important to understand this number as you make the determination if your side-hustle is a hobby that earns you some spending money (absolutely nothing wrong with that — it’s not the subject of this piece, but that can be a great way to get yourself debt-free), or if the potential is there for this to be the legitimate and sole way you make your living.
Basic Accounting and Turning on the Flow from the Cash Tap
Accounting practices are more or less anathema to the creative types. But understanding a few basic accounting principals is not only good for you and your business but it will open up your understanding about the way your clients are likely thinking about handling money.
The first thing to understand is this: standard accounting practice keeps your money in your accounts for as long as possible.
The reason for this is simple — if the money is in your account, the interest earned on that money is more money for you. Businesses aren’t doing anything wrong here, that’s just how banking works. For you as a freelancer, this can mean a few things. First, incorporate this into your own practice as well. Don’t pay bills late, but certainly pay them at or near the due date as opposed to when you receive them. That means more interest earned for you. Second, it means to make sure you’re dating your invoices. If you provide a client with an invoice that doesn’t have a due date on it (and penalties for paying late), then you have exponentially increased the likelihood that they will drag their feet in getting paid. They aren’t being shady (most likely), they’re just following standard accounting practice.
In light of this fact, then you as the freelancer need to plan accordingly. While you may have completed a project, it may be another 90 days before you receive those funds (depending on how you dated your invoice and what you’ve negotiated with the client). That’s three months of rent you need to pay. The difference between cash and income becomes starkly apparent when phrased that way.
Two definitions before we move on. Cash is cash. The stuff you can spend right now, today. Income is what you’ve earned from your work. There are two schools of thought in accounting about how to calculate income — the first being to count it when the funds are actually received (when you get the cash), and the other is that you count it as income when it is earned and you reasonably assured of getting paid. I tend to advocate for counting income when it has been earned and you’re assured of getting paid, and that’s because I believe it offers a fuller picture of where things stand in your business from a decision making perspective.
Understanding your income and your cash flows become vitally important in projecting your future cash on hand. How else can you determine if you need to spend more time now looking for clients so that your cash flows remain steady, or if instead of looking to add clients in volume, looking for clients that will accept a higher rate from you? And don’t forget — this accounting work should be factored into your hourly rate as well (either as an expense of having hired an accountant or for the amount of time you personally spent on it).
Scale and Diversify Your Business to Stay Out of Freelancer Hell
Tim Ferriss ruined all of us. With the publication of The Four Hour Work Week that became the dream for many of us — building a lifestyle where we weren’t beholden to clocking in and out of an office day in and day out. That turned a lot of us towards freelancing, but unfortunately, it can become very easy to get trapped in what I call freelancer hell. If you’re only making money when you’re actually doing work, then you’re in freelancer hell.
From any stage in your freelancing journey, you should be working towards growing your income while also limiting the number of hours that you are actually required to work. For some industries, this is significantly easier than others. You may be in one of those difficult industries, or you may be saying that the reason you love freelancing is that you love what you do. That’s great, and ultimately, the ideal — but I’m not saying you have to stop working. What I’m saying is that you want to limit the amount of time you have to work.
There are a multitude of reasons for this, but the two I’m going to focus on are really two sides of the same coin: getting sick and going on vacation.
I’ll start with the bad news first: you’re going to get sick. I’m not going to dive into the implications of a major illness, or why you should incorporate the cost of healthcare into your freelancer expenditures. I’m not concerned with catastrophic events in this particular moment. Remember, I’m an audiobook narrator — getting sick for me involves a cold. If I’ve got a stuffy nose, then my voice sounds different and I’m going to be unable to work that day. For some of us, even a slight disruption in income can quickly snowball into a much bigger problem.
The good news side of this coin is that occasionally, we all want to getaway. We want to take a week or two off, relax with our family, go see a new place, or even just make it a staycation. Outside of the expense considerations, as a freelancer, if you’re only earning money when you are actually working then you have an extra consideration: can you afford two weeks without earning? Freelancing in this scenario is also often about momentum — will you still have that same momentum after you take some time off or will it take you time again to re-ramp up to what you were earning before you took a break to rest and recover? Those in traditional work environments that don’t include paid vacation don’t have this same worry — there will be a job for them when they come back.
The solution is to focus on scaling your business in such a way that you’re able to step away for a bit and then step right back in when you’re recharged. Or not — depending on your field, you could potentially build a business that more or less runs without you, but grows as you work to make it grow. Some fields have obvious ways to earn a passive income stream. In audiobooks, we’re able to create a steady stream of royalties. For me, that means I’m including royalty share projects along with projects that pay me a single flat rate (and counting the hours spent on both in calculating my hourly rate) to slowly and continually build up a stream of income that comes in every month, regardless of if I’ve gotten behind a microphone or not.
The other is by diversifying your business and your portfolio. Find ways to add on to your business — an audiobook narrator writing a Medium post about what he knows about freelancing from being an audiobook narrator is a good example — that can add an income stream that you don’t necessarily need to focus on as strongly as your primary business. The other way to phrase this is “building a brand”.
Adding help is another way to ensure your product keeps moving out the door, even if you are unable to physically get it there. If you make really cool chairs on Etsy, could you teach someone else how to build the chairs, while you focus on designing? This does add costs, but it also adds another set of hands to fulfill orders either when you are unable, or when more than you can handle are coming in.
This also means building out an investment portfolio that is generating real income for you, now and in the future. The amount of capital that this will ultimately require may seem daunting now, but just like you aim to scale your freelancing up to replace your traditional job as your primary income, work to scale your investments up to replace your freelancing as your primary income. Turn a side-hustle into your primary hustle and back into a side-hustle again because you have set yourself up in a situation where you don’t have to work.
Remember that side-hustling you did to pay down debt? Keep that same hustle rolling as you invest in passive income streams.
Find Balance — In Business, In Life, In Accounting
The final business concept I want to talk about is the balance sheet. Put simply, it is an explanation of what you own and what you owe. This is important to understand in both your business life and your personal life.
There are two concepts I want to pull from the balance sheet: current assets and current liabilities, as well as long-term assets and long-term liabilities. The point of the balance sheet is that you can utilize this information to assess the health of your business and to guide decision making in both the short and long-term. This is vitally important as a freelancer.
First things first, you probably started on this journey to gain more control over your work-life balance. Check-in with yourself on a regular basis about how you’re doing. Use your hourly rate to be sure you understand the time invested versus the financial gain — and how that balances with the other opportunity costs in your life. Are you spending less time with your family than ever before? Do you feel like you’re constantly working and never get a break? Have you started to lose the joy that you found in this work that started you down this path in the first place?
Then something is out of balance, and you need to solve it as soon as you spot it.
Looking long-term, where do you want this road to lead? There can certainly be joy in taking a winding drive to nowhere for a while, but eventually, everyone wants to go somewhere. Determine a destination. What are the long-term issues that may prevent you from getting there? Make a plan to move those issues out of the way — or chart a course around them.
Ultimately, the balance sheet is about understanding and balancing the now and the then. What are you working on now (and what issues are you dealing with now) that are leading you to a better tomorrow? As you march toward that better tomorrow, what issues may be appearing over the horizon? How can you work today and plan for tomorrow to relentlessly pursue the life you dream of?
The life of the freelancer is not an easy road. But with a few tweaks to your understanding of business basics, you can at least fill in a few potholes.