How to create a budget

Why should you set a budget as a freelancer?

As a self-employed freelancer, there can be months when income is stable. There are also months when it is more fluctuating or, in the worst case, absent.

Self-employment isn't always predictable and can be a rollercoaster ride.

It doesn't matter though, as long as you remember to account for it so you're prepared for unforeseen expenses and dry months.

Get a thorough overview

As a freelancer, it can therefore be a very good idea to to give yourself an overview by setting a realistic budget.

A budget that also separates your personal finances from the company's.

Security, peace of mind and financial stability are therefore some of the main reasons why freelancers should be budget-conscious.

Read below to find out how to get started with your freelancer budget.

Budget as a freelancer: Income and expenses

When you start setting up your freelance budget, it's first and foremost important to get an overview of your income and expenses.

The goal is to make sure it all fits together.

Therefore, you can start by making a list of your expected expenses, which you can divide into two: variable & fixed expenses.

There are plenty of free budget templates to help you get started here.

Fixed expenses that a freelancer typically has can be:

• Office space rental
• Phone and internet
• Insurances
• Auditor/administration
• Business account
• Accounting program

Variable expenses that a freelancer typically has can be:

• Transportation/travel
• Equipment, programs, work tools
• Marketing and marketing

Of course, variable expenses are more unpredictable, which is why you should include them in your budget. Approximately how much do you expect to spend on variable expenses in the future?

Your income as a freelancer

When it comes to freelance income, this can also be more unpredictable.

A good idea is to make an overview of your current projects to calculate an approximate income.

You can also look at recent months' incomes to find an average income per month - if, of course, you plan to continue the business as usual.

Setting up income goals as a freelancer

You can also turn things upside down and use a budget to set new goals.

Once you have an overview of your business budget, you'll know what's left to pay yourself.

You'll be better able to see how much you need to earn to stay on budget and keep your freelance business running smoothly.

What do you want or need to earn?

After all, the most important thing is that your business is profitable and that you can live the life you want.

Your budget can therefore be used to set new income goals, as motivation to find more customers - when you have an overview, it creates clarity and clear goals to work towards.

You may also find expenses along the way that you can cut back on and adjust your income goals accordingly.

A freelance budget; start-up, operational and cash flow budget

To get the best overview of your business finances, you can choose to divide your budget into three.

This means creating a start-up, operating and establishment, operating and cash flow budget.

Virksomhedsguiden.dk has several templates and budget templates available to you free of charge that make budgeting easy.

A budget can be set for 1 month, 3 months, half a year ahead, or any time period you want.

To create as much stability as possible, it is recommended to set a long-term budget. For example, it can be for six months or a whole year, where you can continuously adjust the budget.

Start-up budget

A start-up budget is most relevant for those who want to get started as a freelancer. The start-up budget gives you an overview of how much it will cost you to start your freelance business, so you can get off to a good start.

Luckily, there are usually not many expenses associated with starting a sole proprietorship.

There are still some set-up costs that you should consider:

• Setting up a business account
• Subscription to accounting software
• Equipment that needs to be purchased in the beginning (e.g. computer, camera, etc.)
• Office furniture
• Consulting services
• Marketing and marketing

With an start-up budget you can get an overview of how much money you need to get your business off to a good start.

Operating budget

An operating budget provides an overview of the expenses and income you expect to have as a freelancer.

In the operating budget, you need to define your revenue and put in the fixed and variable expenses that we mentioned in the previous section.

It allows you to predict how your business will perform and whether your business will turn a profit.

Every month, you can compare your operating budget with your actual accounts to ensure that your operating budget is always realistic.

Liquidity budget

If a liquidity budget is necessary for you depends a bit on the type of business you run.

A cash budget tells you if your business has enough money in the bank to pay the bills that may come.

Overview of payments

It will also give you an overview of when the various deposits and withdrawals are due.

Therefore, this type of budget is most relevant if you have multiple or larger expenses that you want to make sure are paid on time.

If your business is very simple and you already feel that the operating budget itself has given you a thorough overview, you can simply disregard a cash budget.

This type of budget will also help you get a better overview of your tax and VAT payments in your self-employed freelance business.

Tips for dealing with fluctuating income

Once you've set your budget, it will give you a sense of what you can roughly expect to earn as a freelancer in the coming year. 

But as you know, as a self-employed freelancer, income can fluctuate, which is why the budget is just a tool to help you.

Create an emergency fund as a freelancer

It may therefore be appropriate to set up an emergency fund, i.e. a savings for emergencies or a buffer.

You can use it if your revenue drops or if you have an unforeseen expense.

Your buffer also gives you security in the months when income is low or if there are challenges with payers - that way you can always sleep well at night!

Put your eggs in multiple baskets - spread your risk

You can also protect yourself by diversifying your income sources. This means spreading your risk and making sure your income comes from multiple sources.

For example, you may have several smaller projects that pay you rather than, say, two large projects that contribute to all your earnings. If one of these two projects were to shut down, you would lose half of your income in such a case.

However, if you have several smaller customers, your income won't fluctuate as much if a customer decides to stop working with you.

If you experience bad payers in your business, it can be beneficial to secure your income by requiring a deposit for your work before you start. That way, you're guaranteed a portion of the money if your customer drops out or won't pay.

Alternative sources of income

You may also find several small sources of income for your business that can help stabilize your finances better. For example, selling online products, courses or other things related to your freelance work.

Get started with your budget as a freelancer

Budgeting as a freelancer can seem like a tedious and overwhelming task. So is budgeting really that important?

Yes! If you want to secure your business financially and create stability, a budget is the ultimate tool. Creating a budget as a freelancer is essential.

It provides an overview, the opportunity for greater financial freedom and most importantly - greater financial security.

When you have a thorough budget with realistic calculations and an emergency fund, you can be more relaxed about your finances.