When setting up your home business, or working as a freelancer, you will need to prepare a financial plan.
For many people, particularly those coming from a corporate or administrative background, this will seem like second nature. For others, particularly those who are more idea-focused and creatively-minded, this can seem like something of a chore. It is a vital step, however, to ensure your long term success as well as your continued financial security.
Financial planning is a rather broad topic, and it is something we will be returning to again and again in future posts, for now we are going to offer a brief overview as to what you need to do getting started with your own home-based enterprise.
Insurance and the types of insurance coverage vary widely from country to country, as does one’s obligations and entitlements. As a business you may be obliged to have certain types of insurance such as a form of professional liability insurance to protect you against legal proceedings. You should also get some income protection insurance to protect against lost income for any reason such as in the event of illness and, on a related note, some form of comprehensive health insurance.
Although you are working from home, because you are using part of your home for commercial purposes, there’s a strong possibility your home contents insurance policy only covers you domestically so you will also need to insure your business equipment and other items separately. You should arrange a meeting with a good insurance broker ideally before starting your business. This way you can get an indication as to what types of insurance you will need and what those costs will be.
Despite there being noticeably less now than there were this time three years ago banks are still a dime a dozen. That’s why they all fall over themselves trying to convince you how nice and friendly they are, how they always put their shareholders customers first and how nothing is more important to them than taking your money winning your custom.
Yeah you can’t go far wrong with some greedy banker shtick on your blog these days but no matter, we don’t have to love our bank managers, we just need to maintain an amiable and professional relationship with them.
So the first thing you’re going to want to do as soon as you have your company formed is to set up a new bank account and, ideally, also get yourself a strictly-business credit card. That way your business and personal finances exist as two completely separate entities – just as they should be.
As I said, banks are always trying to convince you that theirs is the best. In my experience you really have to shop around as far as finding a bank is concerned and not just go with whatever company has the nearest branch as many people do. Some will want to charge you through the nose for even the most basic services and turn every little transaction into a massive pain. They are, therefore, best avoided. Feel free to chat with other business owners you know to compare notes on what banks they use and why. Remember you aren’t just looking for the best rates, you’re also looking for service and convenience.
Your needs will, naturally, vary depending on where you’re based and what sort of business you have. Your choice of company formation will also dictate what account you have and whether that account is in your name or the name of your company.
Online banking is a must but, once again, online banking services are not all created equal. Be sure you know in advance what your online banking account allows you to do and what you can’t do. At the very least it should be updated frequently so you can view your up to date account balance and should also allow you to make payments and transfers. Some banks make this a very simple (yet secure) process, others make it a needlessly complicated nightmare.
Now that you’ve set up your new business account it’s time to start using it. As mentioned, online banking will make this much easier but you should also start keeping accounts. That doesn’t mean you need to study to become a chartered accountant or anything like that, it simply means keeping receipts and records of all your transactions and devising a system that allows you to track how much money is coming in and how much money is going out.
You don’t want to be at the point where you’re trying to figure out what that 250 bucks that went out two weeks ago was for or get blindsided by some large direct debit you’d forgotten about and end up with a severe case of overdraftitis. Your accounting system doesn’t have to be anything complicated just two columns; money in and from where, money out and for what. Doing this ensures you always maintain a firm grasp of your day-to-day finances.
Keeping records also makes it easier (and therefore cheaper) for your accountant to do your main accounts and taxes because he or she will already have all the necessary information, easily referenced and accessible. Some of you may be saying, yeah, well I don’t need an accountant I can do it all myself – and maybe you can – but as your company grows, expands and continues to get busier you simply won’t have the time. So best to start looking for an accountant sooner rather than later.
Income and expenses
That said, although they can be excellent sources of financial advice, an accountant’s job is not to manage your finances, that part is up to you. So you are going to have to ensure your spending is always under control and you are also going to need to figure out exactly what your company’s running costs are. This includes everything from stationary and equipment to marketing and advertising costs, plus utilities and services. Remember to include every little expense, from insurance costs and bank charges to printing costs and web hosting.
Accommodation and utility costs should also be factored in such as your heating, water, electricity, phone/internet and your rent/mortgage. Some of these will undoubtedly overlap with your domestic spending in which case you should deduct it. For example if you use one room out of six as your office then the cost of that room should be considered a part of your business’ expenses. You may also share utilities so you need to work out as closely as possible how much of each utility you are using for business rather than domestic. Examples of utilities include electricity, phone/internet and cellphone costs
Other costs incurred, such as travel expenses, including fuel costs, hotel stays or lunches with clients, should also be factored in. This is another reason for having an accountant, as he or she will be able to offer advice on this and also, where appropriate, help determine which expenses are tax deductible.
Wages & Rates
In addition to expenses you will also need to consider what wages you want to pay yourself. Starting off these should be reasonable enough but you should still be taking home enough each week to live comfortably.
When you have worked out your expenses and wages you can then work out how much you need to make to cover your business costs, work out your monthly and yearly running costs and, working the other way, you can also use this information when working out your hourly rate.
Your hourly rate should be enough to cover your expenses with a sensible margin of profit on top. This, of course, will depend on numerous factors including your geographic region or target region and the currencies involved, the type of business you have registered, the nature of your work and your level of experience.
The temptation, starting out, is to set your rate really low to attract as many clients as possible. The danger in this is that by making yourself cheap you run the risk of cheapening yourself and potential customers’ estimation of the standard of your services. Bear in mind, also, that, as a freelancer, you will be competing globally and so, no matter where you’re located, there will always be someone cheaper.
Instead your rate should allow for a healthy profit margin. These profits can then either be reinvested into the company (for example to buy new equipment or software) or kept in the company bank account as a safeguard against those times when business gets slow (which will invariably happen) or, if you so wish, you can always increase your salary.
Just don’t decide to become a corporate raider by paying yourself an enormous salary at the expense of your own company. Be especially careful with that company credit card and whatever you do don’t get in the habit of taking money from the kitty. Always keep your business money and your personal separate, that means no IOUs, especially TGIF IOUs!