Financial management is an important part of starting your own business. As an independent contractor your job isn’t just about keeping your clients happy and moving from project to project. It will also involve taking on an administrative role to help make sure your business runs smoothly and compliantly. Here are eight financial management tips and topics to consider when starting your company.
1. Consider the Startup Capital You’ll Need
If you are just starting out as an independent consultant, there can be a significant lag time between landing your first client and getting paid. Payment terms may be 30-60 days, and you typically won’t seed an invoice to a client immediately. In order to make sure you can keep your business running smoothly while you get started on those first projects, make sure you have enough startup capital to keep thigs moving along for at least six months without income.
As you establish your company, you’ll want to some sort of savings practice in case you run into situations where a client is late paying their bill, you have to replace a piece of equipment, or if you have a lull in new projects. Having at least six months of expenses in an emergency account will help give you peace of mind when these circumstances come up.
2. Dial in Your Budget
There’s a lot to consider when building your budget for a new business. Start by listing your fixed costs like Internet, taxes, subscription-based fees, health insurance, retirement contributions, marketing or advertising expenses, etc. These are weekly, monthly, or yearly costs that are unlikely to change much.
Next, take a look at your variable expenses. These are things that aren’t as consistent as fixed costs. This could include a one-time cost of setting up a home office, a design fee for your professional website, or a networking event you attend. With these costs in mind, you will be able to set a bill rate that allows you to make the revenue you need to keep your business running.
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3. Review Necessary vs. Nice-To-Have Costs
As you start your business, there will be plenty of opportunity around every corner to spend money. Separating what’s truly necessary from what’s nice-to-have will help you make better decisions for the future of your business. One area where you can save is sourcing used office furniture or certified refurbished tech. Opting for a home office also tends to be more cost efficient initially than renting an office or even signing up for a coworking space.
On the other end of the spectrum, investing in quality technology that you truly need to do your job is usually worth the cost. Prioritizing your physical comfort by spending a little more on an ergonomic chair if you do decide to work from home can make a big difference in productivity as well. Lastly, taking the time to create a professional website—whether you DIY or hire someone to design it—is an important investment to help attract clients and establish your business.
4. Set Your Bill Rate
There are a few different ways you can calculate your bill rate. Cost-based rates consider the total cost of your services and include variable and fixed costs. Market-based rates are based off of the supply and demand of the industry you work in. value-based rates reflect the value you provide to your client and a determined return on investment in your services.
No matter what method you choose, you’ll want to consider your overall costs, your billable time, and your profits and losses. Then, decide if you want to bill clients hourly by the project, or a hybrid of the two.
Check out our Bill Rate Calculator to find the best bill rate for your business.
5. Decide on a Way to Track Your Time and Expenses
Tracking your time and expenses sounds easy enough but can quickly get complicated if you don’t stay on top of it. Think about how you work best, and try out a few different methods to see what sticks. Some options include: a mobile time tracking app, using an accountant or bookkeeping service to manage client invoices and expenses, or DIY account management software.
6. Review Your Tax Obligations
If you haven’t done it before, paying taxes as an independent contractor can quickly get complicated. As an independent contractor you are responsible for paying both income tax (according to your tax bracket) as well as both halves of Social Security and Medicare (FICA). This accounts for setting aside at least 30-35% of. Your gross income for taxes.
Typically, you will pay these taxes quarterly because they are not taken out of payment you receive from clients. You can pay federal taxes online using 1040-ES, Estimated Tax for Individuals and the Electronic Federal Tax Payment System (EFTPS). You’ll also need to look at what state taxes you may owe depending on where you work. these are typically paid quarterly a s well. If you’re new to the independent contractor tax game, it can be helpful to consult a tax expert the first time around to make sure you are doing everything by the book.
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7. Establish Business Credit
Business credit tacks the financial responsibility of your company. Investors or financial organizations can use it to determine whether or not your company is a good candidate to lend money to or do business with. If you have good business credit, you will get better access to loan terms, insurance premiums, and credit line increases. You can build business credit by applying for business credit cards and paying them on time or establishing trade lines by purchasing items for your company through suppliers and paying them back at a determined date.
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8. Plan for the Future
Planning for your company’s future is an equally important part of financial management. Set aside time to track your financial data. Conduct a quarterly review to make sure you are pricing your services correctly, that expenses are being tracked, and that invoices are being paid. Small things are often easy to overlook, but can make a big difference in the long run.
Lastly, don’t forget to pay yourself! It can be hard to do this when you are first starting out, but once you have a steady stream of projects and revenue coming in it is time to pay yourself a reasonable salary.