Managing Your Finances as a Solopreneur
What you need to know for your business finances.
For part of my career, I was on the executive team at a small startup. Every month, we'd review the company's financial performance, compare the results to the budget, and make adjustments if necessary. We also had to make decisions about hiring, larger business investments, and the overall direction of the company.
Today, I'm a solopreneur. I run a freelance writing business and create online resources for other freelancers/solopreneurs. Even when my business was very new and very small, I paid close attention to my finances. Because of my past experience, I know how to manage my money and how to plan for different things (particularly unexpected expenses!).
But a lot of solopreneurs don't have that corporate background — and don't know where to start. There are a few basic things you should understand about your business finances and also know when you need outside help. You can't ignore the money part: as long as money is coming in, you should know how it impacts the overall health of your business.
Reviewing overall profit and loss
Every month, I review my business's Profit and Loss Statement (P&L), which tracks all your money coming in (revenue) and money going out (expenses). The difference between the two is either Net Profit (if you earned more than you spent) or Net Loss (if you spent more than you earned).
My P&L statement is generated through Quickbooks, which is my accounting tool and also what I use for invoicing. Any accounting software would have the same, and usually is a click of a button. While there are some standard categories, you can usually customize your P&L so it reflects how you'd like to understand your business.
Income and expense categories
For example, I have different income streams, so I have subcategories of my income so I can track how much each is earning. I also pay for a lot of apps and tools, so I categorize these as "Critical Apps" and "Non-Critical Apps." Critical means I need the tool to make my business run. Non-Critical means it's helpful, but I could cancel if needed.
This designation is completely specific to me and how I like to think about my expenses, but those are the things you can set up to make your P&L more meaningful for you.
Financial trends
Now that my business has been running for a few years, I also look at month-over-month and year-over-year trends. Month-over-month compares my most recent loss to the month before it. So, if I were looking at the P&L for June, the comparison would be to May. Year-over-year compares June of the current year to June of the prior year.
Sometimes, year-over-year is more meaningful. I have seasonal dips in income, like many freelancers. Summers are often slow because many of my clients are on vacation. But if I compare June of one year to June of the prior year, it's a more accurate picture of how my business did for the month.
Since it's just me and I'm a solo business, I don't look too hard at monthly swings. I like to look at quarterly statements to understand if my business is growing.
Profit margin
Part of reviewing your profit and loss is understanding your profit margin: how much money did you earn compared to how much you spent? If you earned $5,000 and spent $500, that's a pretty healthy profit margin. Much different than earning $5,000 and spending $3,000.
Profit margin is expressed as a percent. If you earn $5,000 and spend $500, your profit margin is 90%: you keep 90% of what you earn. In this, you also have to consider what you pay yourself. You may have earned $4,500 more than you spent, but pay yourself $4,000 — so only $500 is "staying in the business."
Your expenses are (most likely) within your control. If you want to improve your profit margin, you'll either have to earn more or cut back on expenses.
As a solopreneur, the most valuable thing in my business is my time: how much time I can give to clients (without spending too much time on client work), and how much time I can dedicate to creating resources for other solopreneurs. Because of this, I'm willing to spend a lot of money on tools that buy me time in my day.
My tech stack consists of about 30 tools, all of which save me a little bit — or a lot! — of time each month.
If you're not sure about investing in tools, many have month-to-month plans. They are usually a little more expensive than an annual plan, but then you're not locked in to the commitment and cost. Look at how the increased costs impact your profit margin and think about whether those tools are worth it for the time they give you.
Anna Burgess Yang
Create a Budget
In the early days of freelancing, it's hard to stick to a budget because you're trying to earn enough to cover your expenses — including how much you need to cover your rent, food, and other living expenses. You're probably also working hard to keep your business expenses as low as possible.
Eventually, you'll earn enough consistently that you can start to work from a budget, rather than basing your business solely around "when cash comes in."
One thing I changed when I reached this point was invoicing all clients on the same day each month (the 5th) rather than when I completed work. If I invoice clients on the 5th, then I can expect cash to hit my business bank account around the same time every month. Some of my clients have payments due within 15 days and some within 30 days, so I can plan accordingly.
I have a monthly budget I stick to for my business. I list the income I expect to earn, my recurring expenses, and how much that leaves me at the end of the month. Because most of my freelance work is ad hoc, it can vary from month to month, but I base my budget on my average monthly income.
If there's extra cash — like if I earn more than I expected — I have three options:
- Put the cash in my "rainy day" savings account
- Pay myself a little extra that month
- Reinvest the money in the business
A reinvestment is something you spend money on because you think it will help you grow your business. It might be a one-time purchase, like a course or working with a business coach for a few months.
Knowing When to Add Fractional or Full-Time Help
Many solopreneurs attempt to do everything themselves and wear "hustle culture" as a badge of honor.
But at some point, you'll realize that you could hire out some work for less than you earn. Yes, you're reducing your profit margin, but you're also freeing yourself up for more meaningful work that can grow your business.
To start, calculate your effective hourly rate — even if you don't work hourly. Take your monthly income and divide it by the number or hours you work per month. Let's say that number is $100/hour. You could outsource some work for $50/hour (assuming that you are profitable and have extra money each month).
This year, I outsourced two functions: I hired a bookkeeper and a virtual assistant. Although I'm comfortable doing my own books, I recognized that it wasn't the best use of my time. My bookkeeper processes everything weekly and sends me my monthly Profit and Loss, along with a few other reports. I still dig into the numbers myself, so I can stay informed about trends and changes in my business.
My virtual assistant handles repetitive tasks. Although I rely heavily on tools and automation, some tasks simply can't be automated and need a human touch. I'm also considering hiring my teenager as a part-time employee next year because they could learn a lot about business and handle work that I'd prefer to keep in the family.
Your Strategic Vision
When you understand your business financials, you can decide where you want to go next. For me, I've maxed out my capacity to take on more client work. My best opportunity is to grow other income streams. Therefore, I'm paying close attention to what I'm earning each month in these other income categories.
Because of this goal, I have to consider what steps I need to take to make this happen and plan for them. It might mean partnering with someone with expertise in platforms I'm not relying on right now, such as Instagram and YouTube. That's another fractional role, so I have to think about the cost. But on the flip side, teaching myself could be very time-consuming, and that would be only to learn the basics.
You might have a goal of increasing your income based on the work you're doing now, so you'll think about the additional value-add you can bring to your clients, and how to raise your existing rates.
Whatever your strategic vision is, you should set goals to get there. Think of it as your business roadmap. Don't go too big because then it's harder to track progress and adjust if needed. Quarterly goals are a good place to start. As you review your financial statements, you can see the changes and decide if you're on the right track.
Want to better understand your business with a quarterly review (not just financials)? You can download my Quarterly Review Checklist.