The definitive guide to going Freelance.

By Kyle Racki and Ross Simmonds

Managing Money

Chapter 7. Managing Money
Piggy bank with money coming out

Cash flow is king in the world of freelance. Why? Because you don’t have a steady paycheque rolling in every two weeks anymore. That means you need to collect on invoices, plan for taxes and minimize your expenses while maximizing your billable hours. This chapter walks through the necessary evil of managing the books.

Do you remember the days when money would magically appear in your bank account ever two weeks? Maybe you received a Christmas bonus every December? As a freelancer, these luxuries are nothing more than a memory as your income will be as irregular as your bowel movements during a camping trip.

Someone who works for a salary receives their regular pay with taxes already removed and probably has access or an auto deduction for an RRSP. As a freelancer, you don’t have that luxury. And don’t even start asking questions about health insurance and how to take care of that! Let’s just say, as a freelancer, you’re in complete control and have the responsibility of taking care of the books, your retirement plan, your taxes and your health care.

So how can you take care of these different items without going insane? First, you need to get organized. The best way to do that is to head to your bank, get advice but also take the following insights into consideration when planning your account and plan of attack

Revenue - Expenses = Profit

Depending on where you live I’d highly recommend incorporating your business. Corporations are distinctly separate legal entities from individual sole proprietorships, so registering your business as a corporation will carry a few benefits.

  • You’ll carry less liability because if anyone ever sues you they can’t get at your personal assets, only the business assets (ie: they can take your computer but not your house).
  • Corporations are taxed separately, so if you are paying yourself in dividends you can drastically lower the amount of personal tax you pay every year.

Of course there’s no one-size-fits-all approach and you should definitely talk to a CPA and corporate lawyer about this. Incorporating is expensive (about $1,500), so only make the move once you’re generating consistent revenue, but don’t put it off too long or you may find yourself with a hefty bill come tax time.

Organizing Your Finances

The same care you put into your clients projects, you need to put into managing your finances. When you receive a check or transfer from a client, split the money into different accounts. One account is what you should use for day-to-day life; it’s your spending account. The second account is specifically for your taxes and you should have a third which is made for a rainy day or retirement. This approach ensures that you don’t make the same mistake that thousand of freelancers make every single year. That’s the plague of forgetting to set aside money for taxes.

In The Money Book for Freelancers, Part-Timers, and the Self-Employed, authors Joe D’Agnese and Denise Kiernan call these three accounts (spending, tax, retirement) the Holy Trinity. Talk to your bank about what types of accounts would be the best for managing your cash and clearly express your itentions with each of the different accounts.

If you’re making enough profit, you might want to consider leveraging RRSPs to simply reduce your taxable income. Further, you may want to consider using a tax free savings account to help generate some gains without worrying about additional tax. These are just two of the many options that you will need to consider, discuss and plan with a financial planner or advisor.

Now, it’s all great to consider where you’re going to put this money but first, you need to think about managing a combination of revenue and your expenses. If there’s anything you need to not only remember but keep in mind 24/7, it’s this simple equation:

Revenue - Expenses = Profit

Don’t get carried away with your expenses! It’s easy to see a check come in and think it’s time to start upgrading your phone, laptop, server, host and every other gadget or gizmo you use to produce work. It’s an easy mistake and one that can back you into a corner come time to pay your bills!

Save money - that’s all you can do really. I still don’t know my schedule until it happens. People come to me on an as-needed basis and that might be in a month or within the next 5 minutes. You just have to be prepared to roll with it.

Rina Miele Freelance Designer
Honey Design

There’s a term you should become familiar with called EBITDA (pronounced exactly how it’s spelled) which stands for Earnings Before Interest, Taxes, Depreciation or Amortization. This is a fancy accounting term for how much you’re earning without taking into consideration things like interest on loans or taxes you’ll owe on those earnings.

It’s a pretty simple calculation, if you made $100,000 in revenue in a year and your operating expenses were $40,000 (office, equipment, hardware, software, power, internet, travel, business lunches etc.) then your EBITDA is $60,000. But of course that $60,000 isn’t free and clear because it will get taxed, you may need to repay loans that accumulate interest, your computer and desk depreciated etc. EBITDA is simply a metric used to calculate the overall health of your company, but it can be misused by shady business people to make your company appear healthier to banks and investors than it really is. Ask your accountant about this and how it relates to your business.

There are several tools out there that can help you keep track of your invoicing and expenses. One of my favourite tools for managing invoicing is Freshbooks. It’s an easy to use tool that helps non-accounting folk keep track of what’s going into their business and what’s going out.

As you build your business, you will want to be able to look back at past records to gauge the future. You can use a tool like Freshbooks to have a clear idea of what your revenues have been like in the past few weeks and also gauge whether or not your business is slowing down or ramping up. It’s also a great tool for keeping track of expenses and allocating them to different projects you’re working on. For example, if you’re meeting with a client and have to pay for parking – You can allocate that to a project so you know how profitable different projects are.

Another great tool for keeping track of expenses is an App called Shoeboxed. The name comes from what many entrepreneurs and I used for their first business to keep track of receipts, a shoebox. Using this app, you simply take pictures of your receipts as you incur them and their system will file the receipts away into an excel or PDF file for tax time. It’s a great way to keep track of receipts while on the fly and can save you lots of headache come tax time.

If you can, try to get at least one consistent client, like a retainer or something so that you know at least once a month, there’s a lump sum coming in because that will allow you to plan a bit.

Jennifer Faulkner Freelance Copywriter
Long Jacket Communication

The final type of software that can be a game changer for your business is Quickbooks. It’s an accounting software that will help you ensure that your business is in perfect standing come tax time and especially if the government starts sneaking around to find out more about your records. It gives you management of everything from profit and loss reports to balance sheets and financial statements. Quickbooks is an accountants dream and without taking the time to learn how to use it correctly, it could be a freelancer’s nightmare.

The final approach to managing your time and money is one that relies on the skills of someone else. It’s the idea of bringing in a bookkeeper or an accountant to help you manage the finances so you can focus on your clients and business as a whole.

Maximize Your Cash-Flow and Reduce Your Risk

You may find you need to buy things on behalf of clients, such as software licenses, printing or courier fees. If you decide you want to offer your clients “one-stop shopping” and have them go through you for all of this stuff, there’s a few pointers to keep in mind:

  • Always make sure you invoice your client as soon as possible so that you aren’t taking away from your precious cash flow and waiting too long for your client to reimburse you.
  • Mark up whatever you buy for your clients by at least 30%. This is standard practice and it ensures you are making money from the things you buy for your client and not needlessly putting your tiny company at risk for purchases. If your client doesn’t like the markup then he can buy the items himself!
  • Collect on the invoice as soon as it becomes overdue. Letting clients wait over 30 days to pay an invoice can seriously affect your cash flow. If you are diligent about collecting you will get paid faster, it’s as simple as that.
  • Try to sell ongoing retainers to regulate cash flow. Many clients prefer paying retainers for services they need on an ongoing basis because it regulates their cash flow as well - they know each month how much they need to pay you versus random bursts of big ticket expenses. Having five clients pay you $1,000 every month is actually much easier to manage financially than needing to sell one project for $5,000 every month and wondering when you’ll actually close the deal and get paid.

..I decided to stabilize my income by selling products, design files, ebooks, etc. It has really helped take away the stress of roller-coaster income.

Preston D Lee Freelance Designer & Marketer


  • Cash Flow is the most important part of business. If you don’t have cash flow, you don’t have a business – you have an expensive hobby.
  • Create three bank accounts to keep track of your different expenses and ensure that you’re not going to get dinged come tax time. One account for taxes, one account for life and another account for a rainy day.
  • Use Technology to keep your finances in check and ensure that you’re not panicking come tax time.
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