As you brainstorm survival strategies for yourself and your business, creating a budget may be a good item for the to-do list. A good budget can help you manage costs, understand where your profit centers are (and are not) and most of all, let you know if you’re really making money and if so, how much.
For Freelancers, the temptation is to simply add up the 1099s at the end of a quarter or year and assume that tells the story. Yet there are always costs of doing business and it is very important that we know where, how and for what purpose we are spending our money.
Do you really need to rent office space? Is it necessary for clients to visit your office, or might it be perfectly acceptable for you to go to them? What is the ROI on the networking events that you attend? Be strategic and selective about the rooms you pay to enter and go to events where you get the most bang for the bucks.
After you’ve been a few times and met a few people, try cutting back to bi-monthly or even quarterly appearances. If you want to keep in touch with colleagues in between, invite them for a coffee.
Tally your gross revenues and cast a cold eye on expenses. These are the foundation of any budget for any business, or household for that matter. Managing expenses has a huge impact on the bottom line. It is possible to lose money overall even if sales are strong, because you either spent too much (money or time) to make the sale or overspent on other operating and production costs.
So if you make and sell jewelry, for example, watch how you buy the raw materials. Do you have the best available sources? Should you buy more and stockpile inventory in order to get a better price? Pay attention to market fluctuations and buy big when prices drop. Managing the cost of goods sold adds to your profit margin.
On the expenses side, be sure to divide fixed expenses (rent, salaries, utilities, long term payment obligations, etc.) from variable expenses (sales commissions, advertising, travel, etc.). Make note of seasonal fluctuations. Does business slow down in July and August—or pick up? Identify where you can trim expenses or negotiate a better deal.
Once you’ve figured out the money coming in and money going out over the past 2 or 3 years and assessed where you are, you can then decide what financial targets you’d like to reach. Maybe you want a certain overall profit margin on goods sold, or perhaps you’d like to have average net quarterly earnings of a certain amount?
While you’re analyzing gross revenue, you may even discover that spending a little money will make it possible for you to make much more. For instance, hiring an assistant at $18/hour to answer the phone, send invoices, deposit checks, post transactions into a ledger or help make jewelry in preparation for Christmas or Valentine’s Day can give you more time to network, prospect, make sales calls or double your output of jewelry available for sale.
Especially for Freelancers and other sole proprietors, how you spend your time can be factored into the budgeting process. Digging into your company finances may just turn up some buried treasure.