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You’ve firmed up your expenses, now what?

It’s time to estimate your actual expenses. Some will have established costs that don’t vary, such as license or permit fees. Others can be far less well-defined, like salaries. Do your research and talk with vendors, service providers, or others to get an idea of what to expect. 

Once you’ve estimated your expenses, you may want to organize them into monthly and one-time expenses. Add these up to get a clear picture of what you’ll need to cover them.

Separate business and personal expenses

As a freelancer or small business owner, the line between personal and business expenses can be blurry – after all, you are the business! However, while it’s important to consider both business and personal expenses as a part of your financial planning, it’s best practice to manage them separately—ideally in separate accounts. 

As you plan your budget, be certain you keep a separate budget for yourself and your business. The salary from your business should be income in your personal budget. It should also be an expense in your business budget. 

It may seem like a minor point now, but this type of separation can provide a lot of clarity later as your business and personal goals evolve.

How much will you need to spend?

As a freelancer or small business owner, you’ll need to consider expenses as a part of your financial planning. Your expenses will include both fixed expenses and variable expenses. Fixed expenses are costs that don’t change, regardless of how much you use a product or service, such as a car payment. Variable expenses change according to how much you use a product or service, such as gasoline. 

What you’ll spend money on as you start working for yourself will vary based on your product or service. 

Your first expense should be your salary. Your salary should be enough to cover your personal expenses. Some freelancers pay themselves the same amount every month, while others pay themselves based on the amount of work. You should also factor in employee salaries and benefits if you plan to have employees in the future. 

Here are some other common expenses: 

Expenses for an actual office or physical space, which may include rent, equipment and supplies, utilities, inventory, communications equipment like cell phones, and any licenses or permits you may need

Other business essentials, such as insurance for both you and your workplace, lawyer and accountant charges, fees you may need to pay to online work platforms, gas if you use your car as part of your business, as well as advertising and marketing costs

Don’t forget new personal expenses you may have if you’re quitting a traditional job. New expenses may include health insurance, disability insurance, or more money for retirement savings if you’re losing an employer match. So, consider building your own benefits package and adding the cost to your salary.

Let’s talk about revenue and pricing: How much could you make?

For a clearer picture of your business’s financial health, you need to first estimate your revenue or the total amount of money you’ll earn in a set period of time (such as a year). Don’t confuse revenue with profit—that’ll be the total revenue minus your expenses. We’ll talk more about profit later.

How much should you charge for your products or services? 

Your revenue will depend on this. There are many strategies freelancers and small business owners use to establish pricing. Here are a few. 

• Cost-plus pricing assesses the cost of completing a project (materials, expenses, time), and then adds on an additional % as profit. Calculating a desired cost-plus price can be a useful way to determine your minimum acceptable price. Be sure you can find customers willing to pay this price if you want to be profitable. 
• Market-rate pricing looks at market averages for your industry and area to determine pricing. For example, if you freelance, look at what freelancers with similar skills and experience are charging to understand what clients will pay. 
• Value-based pricing bases the cost on the ultimate value to the end client. In this scenario, you may price clients based on a percentage of expected profit or new business. 

If you’re a freelancer, you may choose to charge an hourly rate or a flat project rate. You could provide certain discounts for work quantity or consider a retainer agreement. Special services, such as rush jobs with a faster turnaround, might include an extra fee. 

Remember that your rates should increase over time, as your experience and quality improve and as your cost of living goes up. 

Estimating revenue 

Once you know how much you plan to charge, you can project your revenue by estimating the amount of products or services you plan to sell and multiplying by your price. Consider best-, average-, and worst-case scenarios based on past months, or ask others with similar experiences how much they were able to sell or work in their first year. Or start your freelancing as a side business first, which may help you better gauge what your revenue could be. 

You may want to set a revenue goal based on what you’d like to earn. At a minimum, you probably want to earn enough to cover your monthly business expenses (which should include a salary that covers your minimum personal expenses). Set your goal based on what you‘ll need to maintain a realistic work-life balance. 

Once you’ve identified your target revenue, it’s important to consider what it will take to reach that revenue. How many hours will you need to work, jobs will you need to take, or products will you need to sell? 

Regardless of how you determine your revenue, it may feel like a guess. That’s ok. Even an educated guess can help you plan. It will also serve as a guidepost as you get started—telling you if you are on track or need to adjust your plan.