How freelancers can improve their business with end-of-year planning

As the end of the year comes into sight, many freelancers will spend some time reviewing how 2018 went and making plans for 2019. Whether you’ve been self-employed for decades or just a few months, end-of-year planning is a valuable tool for creating the business and the life that you want.

In just the last two years, my end-of-year planning has helped me:

  • Drop services that didn’t play to my strength and focus on the areas where I can deliver the most value for clients.
  • Drop clients that weren’t a good fit for my business — or that I didn’t enjoy working with.
  • More than double my profit margins.
  • Helped make me happier, healthier and wealthier.

In the corporate world, annual planning often starts months before the end of the year. But for freelancers and the self-employed, annual planning is faster and simpler. I’ve developed a three-step process that any freelancer, consultant, self-employed professional or microbusiness can use for end-of-year planning.

You could do all three steps in one long session, assuming your finances are fairly well organized. But I prefer to break it up into shorter sessions over the course of a couple of weeks. That allows more time for reflection and thinking in between the nitty-gritty of the planning process. And whether you do this in December or January is mostly a matter of personal preference and your available time.

In today’s post, I’ll go over step 1 — financial review and financial planning.

A freelance business is a business, and most of us have bills to pay. So having a strong grasp on your finances is a critical part of successful freelancing. A good way to start planning for next year is to review how this year went financially.

There may still be a few checks outstanding, but by mid-December you should have a pretty good grip on how your finances are going to turn out this year.

Evaluate your financial results

Here are some questions to ask yourself:

  • How much money did you make?
  • What were your expenses?
  • What was your total profit (revenues minus expenses) and your profit margin (profits divided by revenue)?

If you have this data from previous years, this is also a good time to compare these numbers to past years. When I run these numbers, I use a couple key pieces of software.

First, I generate a payments report from my invoicing software. That tells me how much money I actually received in 2018. I can also look at my outstanding invoices and estimate pretty accurately what I’ll likely still receive before year end.

Second, I generate an expense report from my accounting software. This tells me how much money I spent on everything from office supplies to paying contractors. Likewise, at this point, it’s pretty easy to add in whatever expenses I’ll incur that haven’ yet hit my accounting software.

With these two numbers in hand, I know my total revenue, expenses and profits.

If you have your accounting systems set up properly, you can also easily run these numbers on a month-to-month basis. Are there some months you did particularly well? Some months not so well?

Determine your biggest and smallest clients

The second set of numbers I look at is revenues and profits by client.

These numbers are similar to the first set, except now I break them down on a client-by-client basis. When calculating your profit per client, you should not include all of expenses, but just expenses related to serving that client.

So, if you hired a contractor to help you with a particular client project, that expense would be subtracted from the revenue for that client. But overhead expenses, such as the cost of new software or equipment you use across most or all of your clients, should not be included.

If you do a lot of hourly billing, or if you keep track of your hours spent on each client, this is also a good time to review which clients provided the most profit per hour for you. Even if you don’t bill hourly, there’s still value in tracking where your time is going and what the most profitable uses of your time are.

Now you can see who your biggest and most profitable clients are and who your smallest clients are. This will be valuable in step 2 of the planning process, as you consider what changes you might want to make next year.

This overall look at your 2018 financial results is also a time to celebrate, if you had a good year, or to reflect on things you might have done differently, if you had a not-so-good year.

Estimate your 2019 revenues

Finally, estimate your 2019 revenues. At this point, the best assumption is to assume that 2019 will be similar to 2018, unless know of something specific that will affect the results. But here’s how you can give your 2019 estimates more specificity and reliability.

  • Do you have clients that are on retainers or consistently do multiple projects with you throughout the year?
  • Do you expect each of those clients to give you about the same amount of work, more work or less work next year?

If you have good relationships with your clients, this is a good time to make some quick calls to confirm your estimates. Tell them you’re doing some planning and won’t hold them to any specific number, but just want a guesstimate about the level of work you’ll get next year.

  • How many one-off clients did you get work from this year?
  • As a group, how much revenue and profits did those clients provide?
  • If you approach your business the same way in 2019 — the same networking, same marketing activities — are you likely to get about the same overall amount of work, less or more?

This gives you a way to estimate revenues from those unpredictable projects that come along that may not be big revenue generators individually, but as a group might make up a significant part of your 2019 revenue.

I like to do these estimates at a fairly high level of detail, so I usually forecast specific numbers for my 10 or 12 biggest clients, and that wrap up all the smaller clients into a single “one-offs” number.

Depending on how these 2019 projections turn out, you’ll go into 2019 feeling pretty good, so-so or maybe really worried. But in any case, at least now you have some financial estimates to form the basis of 2019 planning.

This is the first of three posts on annual business planning for freelancers and microbusiness owners. Read Part 2 here and Part 3 here.

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