Many self-employed people find out the hard way that they need to upgrade their financial management skills. It’s actually quite common for inexperienced freelancers to make critical mistakes that greatly diminish their profitability. While a few slips are fine, repeating such mistakes too often can render a freelancer’s business untenable. Eventually, the most successful independent contractors learn how to control their finances, but this process can be long and arduous, with a number of setbacks. A good way to accelerate this process is to avoid some of the most common unforced errors, including the following:
- Liquidity crises. Freelancers are paid in irregular intervals, so making sure the money lasts until the next payment is an essential skill for anyone working as their own boss. Just one late invoice can completely throw the financial plan off the rails, so it’s wise to leave a margin of error just in case something unpredictable happens. Ideally, every freelancer should have a little stash of cash on the side, in order to help weather the storm and make it through a lean month without experiencing a severe liquidity crisis.
- Credit card debt. Being overburdened with credit is not exclusive to self-employed workers, but many might be even more vulnerable to this trap. Due to the difficulty of obtaining credit without a full time job, freelancers are often stuck with large debt that can’t be readily refinanced. While a prepaid card may seem like a tempting option, try to avoid it as they almost guarantee hidden fees that add up in the long run. If you just do a little research, you’ll find that there are a number of banking options that will take you on board, even with bad credit.
- High currency conversion costs. These days, a majority of freelancing work takes place online in an international environment where clients may use several different currencies to pay clients and collaborators. In theory, any currency is just as good if you exchange it at a favorable rate, but in practice this may be more difficult to achieve than it sounds. Many online services offer currency conversion, but usually offer meager rates and charge significant fees on any transaction. The golden rule here is that fewer conversions means more money in your pocket.
- Poor record keeping. It takes a lot of skill and more importantly discipline to keep financial administration in order. Many freelancers fail to realize why this is so important and simply spend money as it arrives. After a while, it becomes nearly impossible to discern which item is already paid for and how much funds are left, leading to a chaotic situation that can easily escalate into a full-blown crisis. Learning a little bit of accounting and paying good attention to maintain accurate records goes a long way towards establishing sound finances.
- Paying subcontractors out of pocket. Freelance work is usually commissioned on a project basis, and clients usually pay upon delivery. That leaves a gap between hiring subcontractors, who might clamor to get paid immediately, and collecting the final bill. It may be tempting to honor the obligations as soon as possible, but this can create an awkward situation if the client demands additional services before settling his account. Not only the project leader faces a lot of financial risk, but some subcontractors might consider the project already closed and then demand additional payment to perform more work. Tread very carefully!
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