The freelance workforce is growing rapidly. Terms like gig economy have entered everyday usage, and digital nomad is now a career path that many aspire to.
Self-employment can feel like a constant balance between art and science. Flexible creative thinking and a steady flow of fresh ideas must be counterbalanced with the pragmatism necessary to run one’s own business—especially when it comes to the financials.
Fortunately, you don’t need to be a professional accountant (or even a naturally-inclined math-elete) to turn your raw business data into actionable takeaways that can improve your financial stability in the future.
As you begin to goal-set ahead of 2018, consider these 7 simple calculations that will reveal powerful insights when it comes to the state of your freelance business.
1. Review seasonality trends
Map out your income-to-expense ratio by month for the full calendar year. If you’re heavy on retainers, the trends are more likely to be consistent month-over-month, barring any new client wins (or losses) as the year progressed. Freelancers who are more project-based will be more inclined to see spikes and dips in income over time.
Using a freelance accounting software (like AND CO) will make it easy to assess your income and expenses over time.
Spend some time with your 2017 “ins and outs,” noting what changed during the natural ebbs and flows of the year. Did you receive an influx of work in a specific month or quarter? Was there a flurry of new business activity during a particular cultural or industry-related event? From your annual report, jot down 3 assumptions and takeaways that make sense to act on in 2018. Work these into your planning strategy to double-down on the wins (and reduce the impact of missteps) in the year ahead.
2. Revisit scope accuracy
Timesheets get a lot of flack in the corporate world, but they’re a necessary evil at large, service-based companies that rely on billable hours to drive revenue. Time-tracking enables an organization to assess the overall profitability of certain clients and teams, ultimately informing important business decisions down the road.
For a business of one, time-tracking is just as important, and much more manageable. For example, Fiverr Workspace’s intelligent time-tracking tool syncs with your invoicing, allowing you to easily bill clients based on actual hours work (versus your best guess). Most time-trackers allow you to track live, a la a stopwatch, or input hours after you’ve completed them.
For significant recurring clients, do this calculation:
(Hours worked – hours scoped) / hours worked * 100
This is the percentage of work you’re giving away for free!
Example: Client A
Scoped at: 10 hours/week
Actual: 14 hours/week (average)
(14-10) / 14 * 100 = 29% → Yikes. In this case, nearly a third of the work you’re putting in is unpaid. It’s time to have a chat with your client to calibrate expectations or increase scope.
3. Compare profitability by client
As a follow-up to the previous calculation, you’ll also want to make comparisons across your clients to determine which projects are getting you paid most efficiently. Of course, these equations can’t speak to the nuances that might make you value a client for non-financial reasons—but if you’re looking to streamline in 2018, this is the best place to start.
When having conversations with regard to scope, data is a powerful asset. If you can prove to your clients that your assessments are based on diligent time-tracking (versus gut feelings, which can make these conversations “up for debate”), then you’ll have a much easier time expanding scope to meet the actual demands of the project, or pushing back on asks to more closely align with the realities of the work.
4. Resolve incomplete payments
This one is straightforward but supremely important. If you’ve been juggling multiple clients and projects this year, take stock of your projects and make sure you get paid by EOY. In your outreach, emphasize the mutual benefit of wrapping up loose ends before the year expires, and remind clients of how many days past due they are to underscore the urgency of your ask.
(Psssst: Still having trouble? Try out this demand letter generator, which will send a physical letter to late-payers for a cool $3.)
Moving forward, using an accounting software that reminds you of past due invoices is the best way to avoid late payments. Fiverr Workspace, for example, will ping you when an invoice is due, let you know how late the payment is, and give you the option to resend the invoice with a single click.
5. Revisit your expense categories
The end of the year is also a great time to audit your business spending. Consider all of the categories of expenses and ask yourself if there are any places to cut down or create efficiencies. While some expenses are unavoidable (Internet, domain hosting, etc.), others—such as the coworking option you choose or your business travel habits—might be worth revisiting.
Profitability is a function of money in and money out. While most of your focus next year will be on money in (either maintaining or growing), it’s also beneficial to look at your spending habits and eliminate any unnecessary expenses—especially subscriptions!—as soon as Jan. 1 hits.
6. Estimate (then reduce) non-billable hours
Here’s a worthwhile exercise to try: For one week, proactively keep track of the time you spend each day doing “non-billable,” work-related tasks. These can include:
- Any client correspondence that doesn’t involve billable work (e.g. creating contracts, following up on late payment, trying to get a revised SOW signed, etc.)
- Pitches and proposals
- Travel time to and from in-person meetings
- Expense reporting and tax preparation
- New business activities like pitching, taking meetings, attending events, or scanning job boards
- Other administrative tasks (e.g. finding a coworking space, purchasing new supplies, managing your domain/website, etc.)
Here are a few easy ways to shave some time:
- Use a contract template (check out this free wizard courtesy of the Freelancers Union) and stop reinventing the wheel every time you kick off a new project
- Use a plug-and-play invoice template
- Create templates for proposals that can be quickly customized based on your prospective client’s objectives and expectations (see tons of free slides here)
- Face-to-face meetings are important for building relationships, but thanks to the magic of Google Hangouts, you don’t need to schlep to your client’s office every week. When it comes to traveling to meetings, choose your battles wisely. A single hour-long meeting can easily turn into a half-day affair.
- Use an accounting software that syncs with your bank account so you can easily file away expenses as you make them. Consolidate all of your business expenses on a single card.
- Finally, learn to say no. Not every coffee meeting is mission critical, and perhaps it’s time to be more selective when it comes to requests to “pick your brain.” Your time is precious, so treat it as such!
7. Estimate self-employment tax ahead of April
April might feel far away, but the end-of-year tax deadline will come up sooner than you think. As soon as you’re paid out for work in 2017, you should commence the process of end-of-year tax prep. If you’ve been paying estimates on a quarterly basis (if you expect to pay $1,000 or more in taxes, then you should be!), you’ll be ahead of the game.
If not, take some steps now to avoid hiccups come April. One 5-minute calculation to make is to estimate your self-employment tax obligations for the year. Many freelancers make the mistake of underestimating this figure, forcing them to scramble when it’s time to send a check to the IRS. Use this free self-employment calculator to get a more accurate estimate. If you under-saved during the year, this gives you three full months to sock away the difference.
For even more tips for growing your freelance business, download Fiverr Workspace’s free e-book, Hacking Independence, which contains 40+ growth hacks you can start using right now.
This article originally appeared on the InvisionApp blog.