Inspirational journeys

Essential Financial Skills Every Freelancer Needs in a Digital Economy

Introduction

If you value freedom, flexibility, and variety, freelance work represents an exciting opportunity. Despite these benefits, transitioning from traditional salaried employment to freelance work can be a learning curve. 

One of the biggest challenges is managing finances to sustain long-term growth. Much like running a business, you’ll need tight controls over pricing, expenditure, and cash flow. This requires careful long-term planning and strategizing. 

Handling tax and compliance can be equally challenging. Successfully navigating legislation often requires thorough record-keeping and reporting. Once again, this can present an obstacle for those used to working for an employer. 

Luckily, with careful preparation and the development of core financial skills, freelancers can prosper.  

Core financial skills every freelancer needs

Every freelancer requires an essential set of skills to handle finances effectively. Examples of these are listed below. 

Table of Contents

• Managing income & cash flow
• Tax awareness & financial organization
• Pricing, profitability & long-term planning
• Staying compliant in a digital economy 
• Financial skills as a freelance advantage

Managing income & cash flow

Understanding the difference between income and cash is key to long-term growth. Both are essential metrics that inform you about different aspects of your business. 

Income is all the money you receive before applying any deductions, such as taxes or expenses. It’s often calculated alongside net income – the profit acquired after all your expenses. To put it simply, sustainable income powers your business day-to-day.   

Managing income is one of the main challenges involved in freelance work. Create a separate business bank account to house freelancing revenue. This way, you can make sure to set aside funds for growth, while still paying yourself a wage. 

Projects come in ebbs and flows. That’s why it’s always useful to set money apart for slower periods. Create a rainy day fund to sustain you when work isn’t forthcoming. Contribute a fraction of your monthly income so this fund stays topped up. 

Cash flow is the money going in and out of your business. When recorded, this is usually broken into three categories

• Operating cash flows - Any costs involved in sustaining your freelance operation, such as software subscriptions, website hosting, and renting office space. 
• Investing cash flows - Costs involved in buying equipment or software needed to carry out your work. 
• Financing cash flows - Any money you take out for personal use or to pay any loans. 

Successful cash flow management is essential for good financial literacy. It's important to know the dates of upcoming expenses. This way, you can make sure you always have enough funds for transactions. 

Simple steps, such as invoicing promptly, can make a significant difference. Large gaps make expense management more difficult and can help sustain more regular payments. 

To increase the likelihood of faster payment, list clear terms on your invoice. For instance, you could request that funds be received within seven days. Remember, clear communication with clients is essential for quicker payments. 

Tax awareness & financial organization

Freelancers are responsible for managing their own taxes and compliance. This requires setting regular reminders as you approach submission deadlines. 

You’ll have varying obligations based on where you operate. In the UK, for instance, if you earn over £50,000, you must comply with Making Tax Digital. This initiative requires freelancers to create digital records and submit quarterly updates to tax authorities.  

Regardless of the legislation that applies to you, however, most regulations focus on accountability. Freelancers are expected to keep clear accounts of all income and expenditure. 

But meeting legislation requires a new mindset. Unless you have experience in a finance role, regular bookkeeping is likely a new skill set for you.  

Freelancers often encounter the following difficulties 

• End-of-year stress -
  Lack of proper bookkeeping often leaves freelancers scrambling to submit taxes in time. Rushing increases the chance of mistakes, potentially leading to fines. 

• Lack of centralized space -
  Records are often stored across various digital and physical locations, making documents harder to find quickly. There’s also a higher chance of multiple records for the same figures, increasing the risk of citing the wrong numbers. 

• Use of a single bank account - 
  Some freelancers mix personal finances with business income. This makes the account reconciliation process much more difficult. 

Practicing simple habits can make a significant difference in improving financial organization. Set aside a small percentage of your monthly income for taxes. It’s worth creating a separate bank account for these funds, so that you’re not tempted to spend them. 

Alongside this, try to build record-keeping into your weekly routine. Set aside a couple of hours per week to record invoices and expenditure. Try to keep important documents in an easy-to-access space, such as the cloud, to avoid missing entries. 

As we’ll explore in more detail later, the bookkeeping process becomes much easier with financial software. The right solutions can streamline workflows by automating the entire process, cutting out the legwork.  

Pricing, profitability & long-term planning

Pricing can be one of the hardest aspects of freelancing. Price too highly, and you may find it harder to secure clients. Price too low, and you risk undervaluing your work.  

When setting prices, freelancers should focus on the true cost of their work. This involves moving from “hourly thinking” to “profit thinking”. 

Think of the costs that would normally be covered by an employer. This includes factors such as sick leave, overheads, and replacement tools or hardware. 

Remember that in salaried employment, your employer would be likely to not only source and pay for training, but also pay you while attending development activities.  Similarly, you wouldn’t have to worry about the cost of new tools – laptop, phone, and office equipment would all be provided by your employer.

Your income will also need to cover vacations and sickness, both of which are usually covered in salaried employment.

As a self-employed freelancer, you’ll need to cover all of these costs. So factor these in when considering your rate.

For long-term stability, you will also need to consider allocating some profits for future use. For instance, how will you grow your enterprise? This might involve investing in new digital marketing software, attending networking events, or expanding your website. 

Alongside training and development, you should also consider the hours spent on unpaid work, such as advertising your business or contacting new clients. 

Following a period of success, you might want to hire employees or subcontractors. Outside of work, don’t overlook future life plans, such as buying a house or saving for a holiday. It’s easy to think only of everyday living expenses, then find you have no savings to cover this type of expenditure. 

Lastly, don’t overlook planning for eventual retirement. Setting up a pension fund can provide vital security in later life. 

Staying compliant in a digital economy 

In recent years, self-employed workers have been scrutinized about their handling of taxes and bookkeeping. This has prompted an increase in legislation aimed at improving record-keeping and transparency.

Earlier, we touched on one example, the UK’s Making Tax Digital for sole traders. Similar initiatives have been enacted across the globe. Australia, Italy, and Brazil are just a few examples.  

For freelancers, this requires a much stronger focus on good record-keeping practices. The old methods of storing paper records and receipts in drawers are no longer enough. Increasingly, compliance requires a much more digitized approach. 

Digital solutions make compliance easier. Below are some examples of features that can help freelancers. 

• Automated data entry -
  Software should be capable of recording transactions as soon as they occur within a bank account. Many solutions also allow users to scan receipts using their phone, which are then automatically recorded.   
• Centralization -
  To ensure accuracy and avoid confusion, it's valuable to have all your financial information in a single space. Records should be easy to access, whether from a computer, tablet, or phone. For freelancers using multiple digital tools and devices, adopting an IT lifecycle management process can also help keep software, hardware, and financial data organized, secure, and up to date throughout their business operations. 
• Easier submissions -
  As mentioned, some legislation requires freelancers to provide updates to tax authorities. Certain digital solutions help make this process easier by linking directly with tax submission sites. 
• Collaboration features -
  Thanks to cloud-based access, software makes it easier to collaborate with accountants. An advisor can log in and gain a complete picture of your finances. This means they’re able to assist more quickly, and potentially lowers professional fees. 

With such a fluid legislative landscape, new regulations frequently arrive. Freelancers should aim to stay up-to-date with legislation so that they can better prepare for upcoming changes. If you have the funds, a tax adviser can help with preparation and explain the more complex aspects of legislation.

Financial skills as a freelance advantage

Financial skills don’t come naturally to all freelancers. You don’t need to be a mathematician, however, to stay on top of your accounts. As we’ve explored, a few simple steps can make all the difference when it comes to compliance and maintaining sound finances. 

Begin by reviewing your existing practices toward income, cash flow, and pricing. Think about the steps you can take to bolster your financial stability. Equally, consider whether digitization can streamline processes and reduce the risk of mistakes. 

Ultimately, handling taxes doesn’t have to be a stressful ordeal. Successful freelancers prioritize attention to detail, planning, and crucially, adaptability.