When you’re in business, it’s vital to stay on top of your finances and keep your books in order, but this can often be very confusing and stressful.
Emily Coltman ACA, Chief Accountant to award-winning online accounting system provider FreeAgent and author of Finance for Small Business and Micro Multinationals, gives her 10 top financial issues that freelancers and contractors should be aware of.
How will you pay for your start-up costs?
Do you need to think about sourcing funding to cover costs before your business starts bringing in the cash from sales?
You may think your start-up costs won’t amount to much, but you could be surprised at how quickly they add up.
For example, do you need to buy a new computer, or a better quality printer? Should you register with a professional body? You’ll almost certainly need to take out insurance. Do you need to have more training, maybe not necessarily in your expert field, but perhaps in marketing or sales? How about getting business cards and letterheads printed? These costs all add up.
Keep your costs reasonable
Don’t waste money, but at the same time, don’t be a Scrooge. If you have your business cards printed on flimsy cardboard, what does that say about the quality of the service your business provides?
Consider whether you could ask your clients to pay you back for expenses you incur while you’re working on their project, such as train tickets and accommodation.
But if you’re on a long-term project, beware of “permanent workplace” rules where travel and accommodation are concerned. If you’re working in the same place more than 40 percent of the time and are likely to be there for more than two years, HMRC consider this to be your “permanent workplace” and you can’t claim tax relief on travel between there and your home, or accommodation and meals while you’re there.
Don’t set your prices too low
It’s easy to just work out your equivalent hourly rate in your last day job and use that when you’re charging your customers, but remember that if you’re not working for yourself, you get paid even if there’s no work to do. That won’t happen when it’s your own business.
Remember also that you’ll have costs to bear – it’s now you who has to buy printer ink and paper, pay for electricity, etc.
And remember that your customers are paying for an expert service. Don’t undervalue yourself!
Look at the VAT flat rate scheme
Depending on what your business does, this could actually save you money, particularly if you sell your own services.
Is your business a limited company? Beware of benefits in kind
When your business is a limited company, it’s a separate legal entity from you. It’s an employer and you’re an employee. This can mean you incur tax without realising it.
For example, if you work from home and use your home phone line to make business calls, and the company pays you for any line rental or private calls, then that counts as earnings and the company has to deduct PAYE and NI from the payments.
Are you a quasi-employee of one or more clients? Beware of IR35
HMRC have just issued business entity tests to determine whether contractors are at low, medium or high risk of being within IR35, that is, taxed as if they were employees of their clients. Remember this works on a project-by-project basis, not for your business as a whole. You might be within IR35 for some projects and outside for the rest.
Keep your books in order as soon as you decide to start
You will inevitably incur expenses before you make your first sale. You need to keep track of these, because if you don’t then you’ll pay too much tax because your profit figure will be too high.
Choose the right system to do your books
Think of what information your business needs and what you need to keep track of. Would it be helpful to know which customers haven’t paid you? To have a ball-park projection of your tax bills, and be able to file your VAT return online?
Choose your accountant wisely
Not all accountants are created equal. Look for accountants who specialise in freelancers as their experience will give them a greater understanding of your specific needs.
Plan for the future
Keeping track of what’s happened already - this is just the start!
Will you have enough income coming in from your business in the future to cover your costs and deliver a reasonable return for you? Might you need to put up your prices, sell more to existing customers, find new customers, or cut your costs?
You won’t know that unless you put together a financial plan – but don’t panic, there are tools out there to help you.
If you are thinking of starting your own business as a freelancer, take a look at some of our available commercial properties based in London.