Many freelancers instinctively focus upon attracting clients and it is natural to concentrate upon this, particularly when starting out. As a newbie, you are undoubtedly keen to find new clients and gain commitments for projects. And this is obviously key to building up a business as a contractor. However, if money is not managed properly then cash flow can quickly become a serious issue that grounds your fledgling business before it has had an opportunity to gain momentum.
At its most basic level, the money that relates to your businesses is either an income or an expense. If the money coming in is greater than the money going out, then your business will be in profit. If not, then it is making a loss. Of course, there are many other factors to consider, but the most fundamental question for any business, including those starting out, is whether there is more revenue being generated than is being spent.
Managing your money is critical to ensuring your business survives. The longer the gap between spending money and receiving income, the more likely a business is to have problems in paying for the costs of running a business. One of the considerations to managing cash flow is to define your payment terms – particularly how soon payment is required after issuing an invoice. Invoices should be issued promptly and where a large contract is being undertaken, it is advisable to agree staged payments at agreed milestones. The latter ensures income is received more quickly and it also reduces the risk associated with receiving a large, one-off payment such as a client being unable or unwilling to pay.
Use a record-keeping system to track details of income (sales ledger) and expenditure (purchase ledger) and update this on a frequent basis. This will allow you to understand the businesses financial situation. The sales ledger will allow you to track the amount of sales invoiced (turnover) and identify where payments are late and require chasing. It also allows a freelancer to analyse which clients and assignment types generate the most revenue, which can be invaluable for business planning purposes. The purchase ledger will track your business’ spending and how much is owed to creditors. Identifying which suppliers most business is done with may also provide opportunities for savings by shopping around or for negotiating better terms.
Record-keeping is also extremely important for tax purposes. Your business will be liable for Income Tax and possibly also VAT and Corporation Tax and you must ensure you have the funds to cover your liabilities. It is highly advisable to set aside money to cover these liabilities and managing tax payments from the outset will avoid a potentially painful squeeze on the businesses finances in the future.
If the taxable turnover of your business exceeds £73,000, or if you expect it to, you must register for VAT. Businesses registered for VAT, will generally charge it at the standard rate of 20% on all goods and services supplied. More information can be found on HMRC’s website here. Corporation Tax is payable on the taxable profits of limited companies and the rate for small companies with profits of less than £300,000 is 20%. Sole traders are treated differently for Corporation Tax purposes and are not liable. Further information on Corporation Tax including allowances and tax relief can be found here. You may even be able to claim a tax rebate, such as a mechanics tax rebate or non UK resident tax rebate.
Additionally, it is essential to create a filing system to store receipts, particularly for small costs such as postage and stationery. For freelancers, business and personal expenses can sometimes intermingle. However, income and expenditure must be kept separate and for record-keeping purposes they should be considered as completely separate entities.
It is preferable to keep a computerised record-keeping system as it is easy to maintain and can be manipulated and modified according to the user’s requirements. It also allows for calculations to be made easily and can feed into other areas such as sending invoices to clients, making payments to suppliers and filing tax returns. There are a number of accounting software packages available which are suitable for freelancers. Included among these are: Sage Instant Accounting, Intuit QuickBooks and Pegasus Capital Gold.
If you run a business from home, you can save tax on utility bills and boiler costs. This depends on what portion of your home you use for business. It’s also best to work out which heating fuel is best for your business. It may make sense to switch to an oil boiler or LPG gas. There are advantages and disadvantages to all sources of fuel. If choosing a new boiler for your business premises, try not to compromise on cost, as the higher the quality, the less the maintenance and the more time for you. It’s essential that your customers always feel comfortable and your machinery works as it should for a business, so choose wisely and discover the best heating options for your business. City Plumbing can help with business or domestic boilers for all fuels, be it oil, LPG or mains gas.