Managing the financial side of your business can be intimidating at first, but understanding the basics of what’s going on when it comes to your income, profit, and expenses—even if you enlist outside help—is an important part of your job. Many independents feel that they can earn more money working on their own, but in order to do that successfully you first need to learn the ins and outs of good business management.
Simple strategies such as maintaining savings, cutting down on unnecessary costs, and sticking to a budget are all good practices, but taking the time to educate yourself on the basics of financial language will allow you to better communicate with clients when discussing these topics, and better manage your business. There are many financial management terms to learn as you dive deeper into specific business finance topics, but here are the essentials to help get you started.
Assets are the economic resources your business has—everything your company owns that has financial value. In general, assets are divided into two categories. Current or short-term assets include things like inventory, cash, or short-term investments and fixed or long-term assets include things like office furniture or tech equipment, or patents or copyrights you own.
Bill rate is the amount a company or professional charges per hour of work. It is the amount you charge a client pre-taxes, fees, and discounts. Your bill rate should factor in the costs you need to cover to make your target income. This is the basic rate on which you build your business.
Cash flow is the movement of money in and out of your business. When tracking cashflow, your money coming in should be higher than money from expenses going out. This is referred to as positive cash flow.
Expenses are costs that are needed to run your business. These include things like utility bills, marketing and advertising costs, legal fees, etc. As an independent contractor you may be eligible to deduct certain business expenses such phone and internet costs, education, insurance, or travel.
Gross income is the total amount you earn before expenses. Calculate gross income over the course of one year; it is the profit you’ve made from the services you provide adding up all client billings before any deductions, taxes, or withholding. Looking at your gross income year after year will help you assess the health of your business. You can pinpoint the clients and types of projects that bring in the most and least income.
An invoice is a document listing the cost of services rendered that tells your client the amount they owe you. An invoice should be clearly labeled as an invoice or bill and contain the following: your name and contact information, date of the invoice, billing period, invoice number, client reference number, client name and address, breakdown of services rendered, rates or fees, and total amount due.
Liabilities are debts or financial obligations your business owes. Liabilities can be current, such as an expense owed to a supplier, or long-term such as a business loan, lease, or mortgage.
Net income, or net profit, is the profit your business earns after expenses and allowable deductions such as marketing or advertising costs, tax payments, home office space deductions, retirement contributions, etc. It can be useful to compare net income to gross income; take a look at high-cost expenses to see what you can eliminate or reevaluate.
The amount of money workers are paid per hour, week, etc. Your pay rate is the amount you are actually paid after any taxes or fees. Pay rates are often based on a market-based rate for a given skill set and geographic area. After you figure out what your total pay rate should be, you can better assess your bill rate—how much you should charge for your services after adding in all necessary costs.
Profit and Loss
A profit and loss statement, or income statement, is used to analyze your company’s profits and losses. Profits and losses are generally summarized each quarter or year. A profit and loss statement contains financial information like revenues, expenses, and profits over this period of time.
Revenue is the income you gain from your business during a certain period of time. This is the amount of income you generate before any expenses are taken out.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.