Invoicing Tips for Freelancers
You probably love the freedom of the freelancer's life: no bosses; no rules but the ones you make yourself; no set working hours; no dress code. You are literally your own boss and bookkeeper, with all the organizational responsibilities that come with that freedom. It's much easier to stay on track financially when you get organized and stay organized. Here are a few tips to help you do that.
Set Up and Use a Separate Business Account for Business Income
As a freelancer, do yourself a big favor and open a business account that is separate from your personal account. This simplifies your life even if your freelance jobs are few and far between. You'll also have an easier time doing your taxes when the time rolls round.
What goes into your business account? All the income you earn from freelancing projects is deposited into this account. This is your "employer" account — use it whenever you're wearing your boss hat.
What comes out of your business account? You pay all business-related bills from this account, including your own "salary." You can transfer money from this account into other accounts for earmarked business expenses for easy record-keeping.
Use a Personal Account for Personal Money and Expenses
For a business bank account to be useful, you'll also need a personal account. When you pay yourself from your business account, transfer your earnings into a personal "employee" account.
Use the money in this account to pay your non-business costs, including food, clothing, rent/mortgage and automobile expenses. You can even use it to buy your mom's birthday present and food for the dog.
But don't dump all your business income into this personal account. That defeats the purpose of keeping separate accounts. Instead, determine a salary that you — the employer — can afford to pay to you — the employee. To do this, figure your minimum profit by subtracting regular business expenses from your freelance income and use that as a starting point to determine your salary.
Open Separate Accounts for Designated Money
More bank accounts? Yes. As a freelancer, you must pay your own disability insurance, fund your retirement accounts and make quarterly estimated tax payments. You don't have an employer who will withhold portions of your paycheck to cover these items, so you must do it yourself.
A useful way of making sure you don't spend your estimated tax payment on a new pair of fancy boots or a plane ticket is to have separate accounts for different purposes. A carefully calculated tax account makes paying quarterly estimated tax payments virtually painless. Ditto with retirement account deposits.
And don't forget to have an emergency fund. You'll need at least six months worth of living expenses tucked away in a separate account to see you through, in case you fall ill or don't have work.
Your main currency, besides money, is time, so keep careful track of how you spend it. You'll find various apps to help you, including OfficeTime and RescueTime, but you can also use manual time sheets. For each incremental time period, note what projects you're working on.
At the end of every week or month, take a close look at the totals per project and calculate your hourly earnings. This helps you determine which gigs bring in the most income and whether it's time to raise your rates.
Time tracking also roots out time-wasting habits that cut down on your productivity — Facebook leaps to mind, but it's not the only offender. Improve productivity by eliminating those habits that eat up work time and don't create income.
Create a Business and a Personal Budget
Budgets help you keep track of expenses. Since wild swings and dips often characterize freelance income, creating a budget requires planning.
You'll want both a business budget and a personal budget. For the former, project the minimum amount of income you earn per week or month, then subtract regular expenses, including the salary you pay yourself, taxes, retirement accounts, debts and business supplies.
For your personal budget, divide your monthly freelancing salary plus other income into personal expenses by type, such as lodging, utilities, food and entertainment. You may not always stick to the personal budget, but it keeps you on top of where your money is going.
Charge an Hourly Rate That's in Line With the Competition
The basic freelancing rule is "don't undercharge." It's tempting to offer a reduced rate to attract clients, but you'll regret it sooner, rather than later; low-paying clients might offer long, tedious projects, and then skip out without paying. Keep hourly rates in line with what your competitors charge.
Your rate — plus the hours billed each period for a client — belong on every invoice you send out. You'll also put the date, your name and address, the project name and the payment due date on each invoice. Mention if the sum requested represents the entire project fee or partial payment. If you use online invoicing software, much of this information will be included automatically. If you invoice manually, put these central facts in a prominent spot.
In an ideal world, you send an invoice and the client pays promptly. In the real world, this doesn't always happen; clients may pay late, make partial payments or never pay at all. Deal with these possibilities without losing your cool by having payment policies in place. Although these are not necessarily lines drawn in the sand, they are rules that you follow most of the time. A few issues to consider include:
Forms of payment you will accept
Whether you require down payments on big projects
Frequency of invoicing
Possibility of late-payment penalties
Whether to continue working for the nonpaying client
Whether full payment must be received before the final product is produced
Invoices are important. They tell the client how much is owed and provide documentation of income at tax time. As a freelancer, you juggle multiple clients and send out lots of invoices. To keep track, each invoice should be numbered.
Invoicing software usually includes a numbering system; for manual invoices, create your own. A numbering system allows you to use the same numbers to track payments, nonpayments and late payments.
Keep a backup of every invoice just in case. This can be on hard copy or electronic storage. That way, if your computer crashes or is stolen, you can still figure out who owes what.