Common Money Management Mistakes

If you don't know what's what with your finances and you don't plan, you can find yourself in all sorts of financial difficulties. Take control of your cash flow. Know your figures. And don't run your business on guesswork.

When you get paid a regular salary, you know exactly how much money you have coming in each month. Tax, National Insurance and pension contributions are automatically deducted. And you know exactly when the next lot of money is going to hit your account.

Working for yourself is not the same. You are responsible for getting sales. If you don't get them, you don't make any money. But even when you are making money, you need to manage it properly. If you don't know what's what with your finances and you don't plan ahead, you can find yourself in all sorts of financial difficulties.

Take control of your cash flow. Know your figures. And don't run your business on guesswork. Avoid these common money mistakes.

Not separating business and personal finances

Even if your business is only you, even if you're a sole trader, and even if you're only making a small amount of money, you should keep your business money separate from your personal money.

Get a second bank account and put all your business income in there, pay all your business expenses from there, and pay yourself a "wage" from there. Don't just stick everything in one account and hope for the best.

Not understanding basic finance concepts

Turnover and profit are very different things, but it's amazing how many freelancers don't understand the difference.

In the simplest terms, turnover is the money that has come in (total sales revenue), expenditure (or expenses) is the money that's gone out, and profit is what is left. If you've billed £10,000 but spent £12,000, you haven't made a profit. And you certainly shouldn't be making financial decisions based on turnover alone.

Failing to budget properly

Too many freelancers rely on guesswork. They don't sit down and do the calculations they need to do to ensure they make enough money. They just pick a turnover target from thin air.

Having a turnover of £50,000 a year does not mean you have a personal income of £50,000 a year. You'll have business expenses, tax liabilities and other costs to consider. You need to budget for these and set financial targets that give you the turnover you need to cover all your personal and professional outgoings.

If you're new to freelancing, do some research - how much money do you need to cover your basic costs? If you're already freelancing, look at your expenses for the last year (or however long you've been in business) - what are your fixed costs, and how much do you spend in total on average?

Investing in the wrong things (at the wrong time)

I often see freelancers wasting money on things they don't really need and scrimping on the areas where they probably should be investing.

Your priorities will be influenced by the kind of work you do, but most of us don't need the highest spec tech, luxury penthouse offices or branded hoodies. And we don't need to be forking out tens of thousands of pounds on website design or brand guidelines.

I'm not saying be tight with your money, just be sensible about what you spend it on. Invest in stuff that will help you rather than paying for vanity projects.

Pricing too low

If your turnover target is based on guesswork, chances are your pricing is based on guesswork too. And a poor pricing strategy causes the downfall of many a freelancer.

Your pricing needs to cover your business costs, personal income, tax, NI and pension contributions, provisions for holiday, sickness and time off, plus all your non-billable time.

I've written about pricing in detail in my guide to pricing your services, including why pricing by the hour is a bad idea.

Discounting prices too often

Getting your pricing right is only going to be of use to you if you stick to it. While you may want to offer a discount every now and then, you shouldn't be cutting your rates for everyone who asks.

When you discount your rates, that discount comes straight out of your profits, which means you're often taking a bigger hit than you think.

Let's say your hourly rate is £100. You do ten hours of billable work, which works out at £1000. Your costs work out at £600, so your profit is £400.

If you decide to offer a 10% discount, your rate goes down to £90 per hour. So for ten hours of work, you now only earn £900, but your costs haven't changed - they are still £600. So your profit is only £300. That's 25% less profit.

And while your costs might not be that high on a 10-hour project, it's still worth doing the calculations before you cut your rates. If your fees aren't in line with someone's budget, that's their problem, not yours. They can either find someone cheaper or increase their budget.

Not keeping track of what's coming in and out

It never fails to amaze me how many freelancers have no idea what money they have coming in and out. They don't track invoices or payments, don't look at what work they've got scheduled in, and don't pay attention to what outgoings are due in the next few months. I find it absolutely baffling.

If you aren't tracking your money, you can end up in a complete mess with your finances.

Put a system in place. It doesn't matter what system you use - find one that works for you - but have a system. What money is available to you right now? What payments are still outstanding? What money needs to be set aside for upcoming bills? Do you have enough work planned for the next few months to cover your costs? When will you receive payment for that work?

Depending on your payment terms, you might not see the benefits of a busy month until six weeks later. And the impact of a quiet month might not catch up with you for two months. Be aware of what has been paid, what is owed, and what is likely to come in or go out so you don’t get caught out.

Not preparing for low-billing months

I like holidays. And when I go on holiday, I don't want to spend my time working. So I make sure I manage my cash flow carefully. But even if you aren't planning on taking time off, it pays to plan for low-billing months. They happen.

Unfortunately, a lot of freelancers don't plan for low-billing months. They have a bumper month and spend all the money, then suddenly find themselves short when they do have a lower-than-average billing month.

That's why I recommend paying yourself a fixed amount each month. I've done this since I started my business (with pay rises over the years, of course). I treat myself like an employee of my business and pay myself the same salary even if I have a bumper month. Any extra money stays in my business. That way, I have a buffer to cover the lower-billing months or the months when I take a holiday. And once I've built my buffer up, I pay myself a "bonus" or increase the amount I pay myself each month or put a little extra into my pension pot.

Not setting aside money for taxes

If you earn over the personal allowance, you will need to pay tax, so your tax bill should never come as a surprise. Rather than trying to forget about it until the time comes to pay, set money aside. Every time an invoice is paid, put 20% of the total into a separate account (or just keep track on a spreadsheet). That way, when you do get your tax bill, you should have more than enough to cover it.

No clear payment terms or processes

It amazes me how lax and easy-breezy some freelancers are when it comes to getting paid. They forget to send invoices or chase them up. Or they don't check whether a payment has been made.

If you've done the work, you should be paid, so make sure you have clear payment terms and processes for invoicing, dealing with late payment, and tracking payment.

The same goes for paying your bills too. Have a system. Pay on time. You don't want to have to fork out for late payment fees or extra interest just because you aren't organised.

Not taking payment in advance

You can solve a lot of headaches if you get paid up front. You don't have to chase invoices or wait months to get paid for your time. It gives you more control over your cash flow and makes it easier to plan for the months ahead.

Relying on one client for most of your income

While it's lovely to attract those high-paying retainer clients, it's also a risk. If you're relying on one client for over 50% of your income and they suddenly end the contract, you've got a big hole to fill. If you have two clients making up 90% of your income between them, and they both go, things will be even worse.

So don't become too reliant on one client. And don't become too reliant on one source of leads. Make sure you leave capacity for non-retainer work, so you have some flexibility and don't rely solely on one marketing channel.

And be consistent with your marketing (even when you're busy), so if you do lose a client, you aren't starting from scratch.

If you need help with your marketing strategy or would like to get more control over your business, why not book one of my 90-minute starter sessions? I'll help you put together a realistic action plan to get you where you want to be.