How To Make A Budget: Guide For Freelancers & Agencies

Freelance finances can be gut-wrenching to manage, with shaky ups and downs like an old wooden roller coaster. There are no steady paychecks. You manage your own benefits. And, of course, responsibility for managing taxes ultimately falls on you.

Taken together, this all makes budgeting feel impossible. But it’s not – you just have to get used to a new style of money management.

In this guide, I’ll talk about how to make the best personal budget for your freelance or small agency operation. I’ll break it down step-by-step, from tracking your income and expenses to setting goals and creating a plan that works for you.

You really can achieve financial peace of mind, even with variable cash flow. You just have to get used to a new way of thinking about personal finances.

Quick Note: As with my other posts, my assumption in writing this is that you’re in the US, running a freelance or small agency operation. You’re probably a sole proprietor or single-member LLC. The vast majority of this will still apply even if that doesn’t describe you.

What if I don’t know what “normal” looks like yet?

Turning your side hustle into your main hustle is a bit like jumping into a pool without knowing how deep it is! With a salaried job, you’ll see steady paychecks. Taxes are withheld on your behalf and you never have to think about benefits.

Your gross pay and your take-home pay are all figured out for you. No income statement required.

But when you’re freelancing or running a small agency, you don’t know how much you’re going to get paid or when exactly you’re going to get paid. And building a budget before you’ve established a “normal” income can just feel impossible.

What are you supposed to do? Extrapolate revenues based on part-time freelancing and hope you make enough to quit your day job? Or dig into Bureau of Labor Statistics data and hope what you find applies to you?

I’ll level with you – there is no easy answer. Not one that can be answered by an online article without consideration of your specific situation.

But you should still start somewhere. Gather data. Track your income and expenses for at least a few months. This will give you a sense for the normal ups and downs and regular patterns. You can start with a simple spreadsheet or free accounting software like Wave.

Write down what you think you’ll make and what you think you’ll spend, and then compare that to real data. Treat it like an experiment!

If you’re starting a business with inventory, a lot of staff, or big expenses like real estate, you have to do more precise forecasting. But if you are working in freelance or agency work with minimal startup costs and staff, then it is perfectly acceptable, and in fact highly practical, to approach budgeting this way.

1. Track your finances.

Building your budget is common in small freelance and agency operations. It’s OK to gradually figure out what normal looks like over a period of months.

But one thing you absolutely must do from the very first day is track your finances. You need to be aware of every penny that comes in (income or revenue) and every penny that goes out (expenses). 

Start by setting up a separate checking and savings account for your business. You can use the checking account for day-to-day expenses and the savings account to put away some money for tax filing.

Then pick accounting software that you like to help track expenses on a regular basis. I use QuickBooks, but FreshBooks and Xero are good options as well.

You need to be thorough! Set aside some time on a regular basis, ideally every week or two, to go into your accounting software and categorize every transaction. Save a copy of your bank statements and receipts and be sure to reconcile from time to time.

Doing this is going to make it considerably easier to not only set a budget, but to make financial statements and file taxes.

2. Understand your income statement.

You need to know how to make an income statement (or P&L) for your business. Your income statement is a financial snapshot that shows the performance of your business in terms of revenue, expenses, and profit.

Income statements are neat summaries of your business performance. If you’re keeping up with all your transactions on a regular basis, they are very easy to make using accounting software too.

Once you’ve created an income statement, you will have a lot of the raw materials you need to create a reasonable budget:

  • Revenues, broken down by client, product, or other revenue stream.
  • Expenses, broken down by line item.
  • Profit, which shows you whether you need to cut expenses or whether you have room to spend more.

But it should be noted – having an income statement alone is not a budget. It’s simply a statement of how money has been earned and spent in the past. You will ultimately end up looking at your income statement and budget side by side to see if you’re following through on your financial goals.

An example of a P&L statement that is close to my preferred template as an example.
An example of an income statement that is close to my preferred template as an example.

3. Categorize your expenses.

When you are setting a budget, you need to categorize your expenses. This means sorting them into different groups based on what they are. For example, Adobe Creative Suite, Canva, and Notion, for me, all go under Software Subscriptions. That way, I can tell at a glance if I’m spending too much on software, rather than having to tally up each line item.

This is great for budgeting, of course, but you also need to do it for tax purposes as well. Doing this will help you know what is tax-deductible and what is not. In fact, if you set it up right, you can even know what comes off your taxes on your regular Form 1040 (which is more personal) and what comes off your taxes on your Schedule C (which is more business).

It’s also worthwhile to note, when you are creating a budget that some expenses are fixed and don’t change often, like software subscriptions, wages or benefits. Others are variable, like fees paid to payment processors.

This is not something you need to worry about when categorizing expenses for tax purposes or for your income statement. But when you are setting a budget, you should be aware of the timing and variability of certain expenses so you don’t end up surprising yourself!

4. Set long-term financial goals.

If you don’t have financial goals, you don’t have a budget. Sometimes, you need to save up cash so you can cover business expenses if revenue streams dry up. Other times, you need to spend excess cash on things that can help grow the business.

You might want to increase your take-home pay. Or, alternatively, you may want to make more money or cut expenses somewhere so that you can hire some help.

Before you make a budget, it’s worth writing down some goals that you want to strive toward. When in doubt, the SMART framework for goal setting is always great if you’re not sure if your goal is a well-defined one.

5. Plan for taxes.

As a freelancer, you’re responsible for paying your own income taxes. Taxes can be a significant expense, so it’s important to factor them into your budget.

I strongly recommend you talk to a tax professional to understand how much taxes you can expect to owe. If you want to go into that conversation with an understanding of how tax is calculated, here is a link to my guide on how taxable income works.

Here are some additional resources to help you understand this better as well:

Savings
I find it easiest to put money in a savings account on a weekly basis in order to set aside money for quarterly taxes.

6. Give yourself a paycheck.

When you first start in business, it is tempting to simply take money out of the business as owner’s draw whenever the checking account has a big balance. This works in short-term and is OK to do if you are part-timing and your business is brand new.

But as your business grows, you will eventually want to set up a regular transfers of money from your business account to your personal account. That way, you avoid the temptation of dipping into business funds for personal expenses while also making sure you have consistent money coming into your personal bank account so you can budget for your household.

7. Write your budget.

Once you have done all the necessary prerequisite work, you can then set a budget. This is surprisingly straightforward once you reach this point.

The easiest way to go about it is to take an income statement from your accounting software. Export it to Excel, and then add a column on the right. Your income statement will show you your actual revenues and expenses.

On the right, you will want to write down your budgeted revenues and expenses. That includes total revenues and expenses as well as reasonable amounts for each line item.

If you’re not sure how much you should be spending on certain expenses or if you suspect you’re spending too much, that’s where you can start looking for specific information online or through other sources to bring your budget in line with what would work best for your financial goals. The same goes for what reasonable revenues should look like, although unfortunately, it’s harder to find specific information for that.

Then, at the bottom, add two more rows – one for your take-home pay and another for “change in cash balance.” Your take-home pay line is really simple – the amount you want to take home in a given period.

The change in cash balance line is a simple formula: profit minus take-home pay. If it’s positive, that means you’re leaving cash in the business. If it’s negative, that means you are reducing cash in the business.

Very simplified example of a quarterly budget compared to last quarter's P&L.
Very simplified example of a quarterly budget compared to last quarter’s P&L.

8. Review and revise.

Your budget isn’t set in stone. Life happens, changes to business happen, and your income or expenses might change.

Review your budget regularly, ideally monthly, to see how you’re tracking. Are you sticking to your spending goals? Did you encounter unexpected expenses?

Be prepared to adjust your budget as needed, especially if you’re in the early and experimental phase. Being flexible will help you keep your budget realistic, which will help serve your financial needs.

Final Thoughts

Freelancing or running a small agency can be incredibly rewarding. I’ve been running an agency for over five years now and I am so incredibly glad that I took the risk and put in the work.

Yes, managing your finances can feel overwhelming. I can completely relate to that! But if you follow these steps and create a budget that is tailored to your unique situation, you can take charge of your financial future.

Remember, your budget will change over time. Tracking your money and paying attention to how you spend it is more important than how you spend every single cent. As you learn, you can review and adjust.

It will take some planning and discipline, but it’s so worth it. Good financial habits are the key to having a secure financial foundation for yourself and for your business, and indeed, enjoying the benefits of ditching the 9 to 5!

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