Making the shift from freelancing to fee-lancing by Priya Sunder

One of my clients, X, is a superbly talented graphic designer. After working for more than a decade with successful advertising agencies across the globe, she decided to break free and strike out on her own. She thought she had it good when she racked up three lucrative assignments within months of starting out. X pulled out all the stops and plunged headlong into completing the projects on time. The clients loved her work. But it’s been 2 years since the projects were completed and X is still waiting to be paid.

Freelancers bring passion and commitment to assignments and are willing to adjust and accommodate schedules and scope of work. Clients are most often delighted with their work, and yet when it comes time to pay, clients drag their feet endlessly. No wonder freelancers feel short-changed and unappreciated. They too have bills to pay and they are forced to quit freelancing and find regular jobs that pay regular salaries.

Many aspiring freelancers have a romantic notion of freelancing—of being the king of all they survey, an unshackling from the routine, the freedom to choose their work, time and place. Yet, when reality hits, they realize this path is full of uncertainty and compromises. The lure of increased family time that once drove them to freelancing now brings stress to the same familial relationships. They long for the predictability of clients, income and work schedules that regular jobs offer.

While my intention is not to scare you away from freelancing, here are a few things to consider if you decide to venture down this path so the experience is a far more positive one:

Create a business plan: When you work in an organization, someone is already managing the accounting, pricing, client acquisition, and marketing aspects of the business. As a freelancer, you are a lone trooper. You can’t just focus on your primary skill—be it in writing, coding, web design, or consulting. You need to think like a businessperson and manage all aspects of the business. Revenue, profitability and customer acquisition targets must take precedence. Only when you have pinned these down, can you determine your fees and the number of projects you will need to meet your goals.

Budget your expenses: List down all heads of expenses and separate them into business and personal. Under business, put down overheads such as telephone, internet, raw material, software, travel, and whatever else is needed. Under personal, list down groceries, utilities, rent, clothing, discretionary expenses, fuel…. Also, earmark a certain percentage of your income for taxes and another 30% of your post-tax earnings towards investments, so you don’t compromise on building your savings. The government offers several deductions where entrepreneurs can set-off a range of expenses against income to reduce their taxes. Factor these in when determining your billing rate.

Protect your fees: Given the perils of delayed payments and frequent revisions of scope of work, you may need a slab-based rather than a flat-fee structure. Revise your rates when the scope extends beyond what you signed up for. Include a clause for delayed payment in your agreement, such as charging a certain rate of interest for each month of delay.

Plan your finances: When you work in an organization, you are entitled to benefits such as provident fund, superannuation, gratuity, bonus, reimbursements, and medical and life insurance. None of this is coming to you as a freelancer. Added to this, your income will not be regular. Hence, you will need to be far more careful in your financial planning as a freelancer than in a regular job.

• Medical insurance: A good level of medical cover comprises hospital, critical illness and permanent disability-covers. A hospital cover is necessary to help you tide over treatment costs in a hospital. The other two offer you payouts that can also supplement your income or meet additional medical expenses.

• Life insurance: Life goals are based on future income streams. Goals of retirement, child education and house purchase are based on future cash flows. In case income stream were to stop today because of any unfortunate circumstance, you need life insurance to cover the gap between current and future assets. Ensure you focus on high cover and low premium policies, such as term plans.

• Liabilities: Your income will be unpredictable as a freelancer. Minimize all expenses that have inflexible payment structures. Hence, reduce or simply close out all loans and liabilities before you venture out on your own. You don’t ever want to cross paths with collection agents.

• Emergency fund: You must have a cash buffer to tide over times when assignments are slow, payments are delayed and other such risks. While I recommend about 4-6 months of expenses as reserves for a regular salaried person, this number would be 6-9 months of expenses for a freelancer—invested in a money market fund.

• Creating an income flow: When income is erratic, I recommend a systematic withdrawal plan (SWP) from funds that are free of exit loads and taxes to generate a steady income stream. Doing so reduces the stress of meeting routine expenses and helps you focus on your work better. When income from assignments flows in, rigorously invest it into the right asset classes.

• Retirement/savings fund: Even though freelancers don’t have a retirement age, you shouldn’t be forced to work all your life. If you haven’t started saving for your retirement or long-terms goals, start socking away money right now. A financial planner can structure the right plan and portfolio for you.

Be ready to change course: If despite giving it your best, the freelance gig isn’t going your way, reframe your priorities. You may need to compromise your freedom for more money. Maybe it makes sense to take up a job and return to freelancing only after you have built up enough of a financial cushion.

Freelancing gives you a long rope to manage your business on your own terms. That’s the reason you chose the freelance route. But that liberty should never come at the cost of your financial freedom.

Priya Sunder is director and co-founder of PeakAlpha Investments.