Becoming self-employed can feel like a dream come true – you get to spend your time on the thing you love most and you are the one in charge of your workload. Unfortunately, one of the biggest appeals of freelancing is also one the biggest deterrents.
Being your own boss means that all the decision-making, all the responsibility, comes down to you. There’s nobody else to pass on the more boring jobs to like finance and accounting.
Some people jump into self-employment without even thinking about the business side of things. Others have a basic knowledge of book-keeping but soon find the more complex elements overwhelming. Eventually, they start making mistakes that lead to long-term stress and potentially the downfall of their self-employment dream.
We’re here to make sure you never make those mistakes in the first place. Forewarned is forearmed and all that. So, what mistakes do new freelancers usually make, and how can you prepare against them?
1. Not Separating Bank Accounts
It may seem obvious, but when you’re transitioning from something you do in your spare time to full-time job, this can be easy to miss. You don’t necessarily need an official ‘business’ bank account, but you at least need to open another personal account to run things through.
Trust us when we say this will make your life so much easier. Managing your income and outgoings, budgeting, preparing for an audit, working with an accountant – it all gets easier if you have separate personal and work accounts.
It could even save you money. Remember that finance professionals will often charge per hour. So, if you can save them time by being organised, you can save yourself some cash.
2. Forgetting About Taxes
Here’s a classic miscalculation from the newly self-employed. It can be so tempting to see all the money that you earn through freelancing as yours. After all, you haven’t got an employer to quickly skim off your taxes before you get to see your wages anymore.
Unfortunately, you still need to pay your contribution to the taxman. If you haven’t prepared then receiving your tax bill at the end of the year can come as a bit of a shock.
To make it easier, spread out the cost by keeping a percentage of your earning back each month. This should stop you from scrabbling around at the end of the tax year to find money that you’ve already spent.
3. Not Saving for a Rainy Day
Just like taxes, it’s now your responsibility to find money to cover all the extra expenses other than your wages. If your equipment needs repairing, nobody else is going to pay that for you. If you need to take a sick day, you don’t have a boss to sort out statutory sick pay for you anymore.
As well as budgeting for wages and taxes, put some money away to form a financial buffer in case things ever go south. The general advice is to build up 3 to 6 months’ worth of wages ready for the worst case scenario.
4. Not Bothering with Insurance
Another thing you can do to prevent everything completely falling apart when you take a wrong turn is to back yourself up with some insurance. For many, this doesn’t become a concern until it’s too late.
Professional indemnity can protect you from being sued by an upset client and public liability will cover you if your client of any property is harmed from your work. You may not think it likely that someone would get hurt through your work but one bad trip over an unfortunately placed briefcase and you’ll wish you had liability cover.
These will often come as part of an insurance package. You could also look into portable equipment and office contents insurance or see whether your bank account covers this for you. Plus, business interruption insurance will help you out if any natural phenomenon prevents you from working, such as a flood.
5. Relying Too Much on One Client
There’s a general rule used in business that 80% of the outcomes comes from just 20% of the causes. It’s known as the Pareto principle and when applied to wages, some claim that 80% of your income comes from just 20% of your client base. Do not listen to this rule!
It’s not a rule, it’s a theory, and while it’s true that some clients earn you more money than others, you cannot rely on that money. If one huge client provides half of your entire income, you’d be pretty stumped if they were to suddenly fire you.
Yes, you’re always going to have those big clients who come to you for all their design needs. However, make sure you have enough other clients so that they’re never producing more than 20% of your earnings.
6. Forgetting to Be Profitable from the Off
When you’ve made the decision to become a freelancer and you’ve settled upon a price list, that’s when you stop doing free jobs for friends and family. It’s very hard to charge people you know for doing work for them. Especially, when you’re still employed and are trying to make the change to being self-employed.
The thing is, if you’re going to make this freelance business work, you need to be making money from the get go. Of course you need jobs to fill up your portfolio but if they really care about you, they should expect to pay and support you.
7. Not Chasing Payments
Asking for money can feel very unnatural to those who are new to freelancing but it must be done. Not everyone is on the ball and sometimes payments get delayed.
Most of the time, it’ll just be an honest mistake so you shouldn’t feel bad for giving them a nudge. They’ll usually apologise for having forgotten and send the money over.
One thing you can do to help is to establish who is responsible for getting your payment to you before you start the work. Do not start to work until this has been settled. Then, you know exactly who is responsible and who to chase up,
8. Charging Too Little for Your Work
This is such a common problem and yet one of the hardest to combat. You may only be starting out but that doesn’t mean that you shouldn’t value the work that you produce.
We’ve already talked about pricing your design work and whether to use an hourly rate or a project-based rate for more detailed advice. Just remember, you have to cover all your work expenses as well as your living expenses so you can’t be too harsh on yourself.
9. Not Treating Yourself like a Business
Really, what it all boils down to, is when people don’t appreciate that they are running a business now. You almost need to act as two different people – the boss and the employee.
Give yourself a defined salary to separate your money from the business’s money. Collect receipts for everything and have a designated business credit card. Get yourself some branded materials so that you look like an official business.
If you can make the distinction between you and your business, you’re half-way there.
Hopefully you have a better idea now of how to manage your finances. One great tool for giving your business structure so that you can achieve all these things is a business plan. Download our Freelancer’s Survival Kit for a business plan template and other essential documents, including an invoice template.