If your freelance business survived its first year, congratulations! In fact, Scott Shane of Entrepreneur magazine recently wrote in “Why Small Business Failure Rates Are Declining,” that since 1977, small business decline rates have dropped 30%. Businesses are thriving and lasting longer than ever. Going forward, it’s useful to analyze what went well and the areas for improvement in your own business. Below is a checklist of financial metrics and topics to evaluate after your first year as a freelancer. We’d recommend revisiting this list every year after that as well.
When you first began work as a freelancer you probably had some rough goals and financial projections. Let’s revisit your initial expectations and create a working outline for future freelance success.
As a freelancer, without clients, there’s no business. Thus, client acquisition and retention are logical places to start your analysis. Here are some questions you should ask yourself: How are you finding new client? What worked and what didn’t work?
Year one is difficult because you don’t have a track record or reputation built up quite yet. You can expect that if you do good work, the subsequent years will become easier in terms of clients finding you on their own and being willing to work with you.
In order to grow your client base, broaden how you think about marketing and promoting your business. Develop a website and portfolio to show your competencies and testimonials from your current clients. Join professional organizations and virtual networks where you can discuss your offerings. Referrals from like-minded freelancers are a superb way to boost business. Build out and grow your LinkedIn profile. Make sure to include keywords related to your business, work samples, and regularly posting interesting updates that pertain to your industry on your site to help both your current and prospective clients.
Net income is an accounting term that equates to your bottom line. It is the difference between total revenue and all expenses including interest payments and depreciation during the one-year time period. In the first year of business, don’t be surprised if this amount is very small or even negative.
Calculate your net income, and use this as a starting point for your future financial projections. Look at all of your client acquisition plans, anticipated expenses, and create a net income growth percentage projection for the future to help guide your cost and growth decisions. This is the best measure of just how much money you’re making year to year.
Ultimately you’re in business to make money. You’re trading your skills and expertise for payment, so you must calculate your return on investment (ROI).
ROI = (Gain – Cost) / Cost
Financial ROI: Compare what you spend with the income you receive. If it equals 1, it means you’re breaking even. Less than 1, you’re losing money, and greater than 1, you’re profiting off each dollar you spend. This is a good way to measure and track how efficient you’re being with your business costs.
Time ROI/hourly income: How much time does it take to earn a certain amount of money? Calculate your ROI on time by calculating your hourly income. If it takes 4 hours of work to earn $100 then your hourly income is $25 per hour. This will help you be rigorous around how you use your time.
Figure out both numbers, but don’t be surprised or dismayed if after one year you’re working for close to nothing. Some businesses take a couple of years to become viable financial concerns. Even if the numbers seem low now, it’s important to calculate this from the start so that you can identify opportunities for improvement and when you look back, you can see how far you’ve come.
Controlling costs improves net revenue. Just as you calculated marketing and client acquisition strategies with the greatest payout, you need to examine your expenses. Which costs yielded the greatest returns? Did you hire a bookkeeper/accountant to free up time to provide freelance services? Is it financially viable to hire this duty out, or would you be better off learning to do it yourself?
Go through your expenses line by line and estimate their value or ROI. Everything from coffee meetings to travel costs should be reevaluated regularly. Make sure they’re bringing you good ROI.
Now that you have an assessment of your financial health after one year, it’s time to start planning for the future. If you ended up the year with net income, you’re doing well. If you have viable plans to expand and grow your freelance business, then you’re on the right track. Now that you have some experience under your belt, it’s a good time to think about how best to move forward profitably, efficiently, and enjoyably!
You can’t do everything, and even if you could, you shouldn’t. For example, if your hourly rate clocks in at $75 per hour, then it doesn’t make sense to complete a task that you can hire out for $25 per hour or solve with technology.
Commonly outsourced tasks for freelancers:
Do a time log for a few days to figure out how you’re spending your work day. Are there time-consuming activities with low returns? Investigate outsourcing those tasks to leave more time for higher return activities that only you can do.
Two important checklist items:
Insurance: Make sure you’re protected with insurance. Get the appropriate insurance to protect yourself from legal liability.
Tax planning: Talk with an accountant about how to structure your business and keep taxes to a minimum.
Take an hour or two to evaluate your progress and plan for the future. This will pay off down the road as it will help you come up with a concrete plan for efficient growth.