Contracting is an interesting world when it comes to money management, since so many contractors are not naturally financially minded. I’m certainly not. I’m arguably the worst person to offer advice on how to manage your day-to-day business affairs. It doesn’t come naturally to me, I’m constantly putting off important jobs and I take lazy options wherever I can.
Which arguably makes me the best person to offer advice, since despite have no instinct for it I somehow manage to make the books balance year after year.
No contractor knows how much they will earn through any given period. That’s the point. But you probably do know how much you’re going to have to spend. And staying in control of what can be controlled is the secret.
So here are my five golden rules for budgeting as a start-up contractor. You’ll probably create your own before too long, but these should help see off some of the bumpier aspects of getting going.
1. Put some money aside for a sunny day.
No contractor needs to be told to put money aside for a rainy day. It’s the default mindset from the very moment you hand in your notice. A less obvious but equally important habit is being ready for days when you just choose not to work. One of the single greatest perks of working for yourself is downing tools, for instance when there’s an unexpected heatwave. If you’ve got a bit of a cushion in the bank account, you can plan holidays as and when you choose, without having to book it in with the office manager.
Taking a spur of the moment break can create a slight lag in your cash flow, but if you’ve planned for it then it’s no biggie.
Just remember that it’s not really a holiday if you try and squeeze in little bits of work on the fly, and getting proper breaks is an essential part of keeping body and mind healthy. Of course, you could just take your laptop on the road and make the world your office?
2. Make a ‘safe place’…and use it.
I’ve always found it easier to save if I knew I was putting the money physically into a separate ‘safe place’, preferably a second bank account connected to my main business account. Having a second account that I don’t (well, pretty much can’t) spend from is great as it keeps me strict but I can still transfer money between the two to deal with short term cash flow issues. In my mind it’s a big mattress with a DO NOT TOUCH sign on it.
Your need for this pretty much depends on how much you earn and how organised you are, but this is what works for me. I’m very disorganised. Which brings me on to my third golden rule.
3. Get organised
Being organised has never come naturally to me, in fact I’ve always felt that every attempt to become a more organised person was in some way dulling my creative superpowers. But as time went on I discovered that a happy medium was easier to strike than I thought, and absolutely necessary to avoid headaches down the line.
For a start, a tidy workspace really helps to clear the mind and inspire focus throughout the day. This applies to your physical desktop as well as your virtual desktop. If they are a mess, so will your work be – and eventually your whole life.
A far better system is to just get in the habit of doing a little bit every day to keep things neat and tidy, especially in terms of tracking who you’re working for. It only takes one client to ask you to break down all the time you’ve done on a long job, to wish you’d been doing it since the start. In the past I’ve had clients ask me to fragment time across different Purchase Orders into different invoices, allowing for time that was quoted but maybe not delivered, and the only way I could do this was to go back into confusing email threads and try and work it all out. Which was not ideal for them, and hugely time-consuming for me.
So now I make notes about every request for every hour worked, and where I did it. Dates, times, places, people. It means everything is transparent, if it needs to be, and it can all be easily pasted into invoices where required.
4. Hope for the best. Plan for the worst.
Your outgoings as a business can soon add up, from monthly phone bills to insurance costs and travel. Even if they’re tax deductible, they still have to be paid for, and costs tend to creep up over time with inflation. If you’re rubbish at budgeting (like me) there are lots of apps that can help.
The same principle is also true of your earnings. Always assume when making plans that you will do okay, that way the sting will be taken out of any sick days or unexpected bills. Such as a toddler spilling milk all over your laptop. (This is not a hypothetical example).
5. Hone your instinct for ‘value’
It’s very tempting to see everything in terms of pounds – happy ones jumping into your bank account, and sad ones jumping out. But it pays to develop a sixth sense for ‘value’ when it comes to making decisions that impact on your time and therefore finances. Some examples of this are more obvious than others. For instance, spending half a day on the phone haggling with your broadband provider to try and save yourself £3 a month probably isn’t the most valuable use of your time.
A more delicate example would be which clients, or even which elements of your client relations, you invest the most time in. Some jobs I’ve worked on have seemed to be quite poor paying at first glance. But a Spider sense for value has led me to prioritise them, which has then paid off down the line. Similarly, the way you market yourself will be very personal, but your ability to tell in advance the most valuable way to invest time or cash, will steadily sharpen over time.
It’s all second nature now, just another one of those pistons that has allowed me to evolve into a (sort of) finely-tuned, (fairly) smooth-running contracting machine.