Freelance: Budgeting for your business

As someone self-employed, budgeting is key. Your income can vary from month to month, so you need to plan ahead. Budgeting can help you feel more in control of your money; understand spending better and where to cut back if needed; and save for future business goals. 

First, consider your income, in other words, how much money is available every month. This might be variable as someone self-employed. If you earn £2,000 one month and £1,000 the next, a budget helps you to identify possible lean periods. You can start to plan ahead for months when income is low. Your budget also includes your expenses – payments that need to be made throughout the month. Some of these may be regular, others will vary.

Track your fixed expenses like rent or professional registrations and your variable costs like travel or marketing. Take time to itemise all of your business expenses. Don’t miss things like software or subscriptions or travel for meetings, remembering to include spending that isn’t always obvious and perhaps irregular, but necessary to keep your business alive.

One of the biggest expenses will be tax. If you’re a sole trader, tax isn’t deducted automatically like it is under PAYE. You’re responsible for putting money aside and paying it through self-assessment, usually once a year, though you can opt for instalments. A common rule of thumb is to save around 25% of your income in a separate account to cover your tax bill. If you run a limited company, it’s different. The company pays corporation tax on its profits. You should factor this cost into your budget. If you pay yourself a salary, tax will also need to be accounted for, whether it’s paid through PAYE or by your personal tax return. Dividends may also create a personal tax bill, so you will still need to set aside money for that too.

It’s also wise to build an emergency fund of at least three to six months’ expenses, to cushion against gaps in work. It’s important to update your budget. It’s not once and done, it’s part of the planning and needs regular review. The freedom, flexibility and growth of your business will largely be dictated by your income. While you might not feel very confident, especially as you start out, you must try not to undersell your services or product. This starts by making sure you calculate your rates to ensure that you can cover all your costs. This is a difficult balance to strike if you’re trying to attract clients or work because it can be tempting to go in cheap.

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