As an employee, my salary (net of any taxes) was credited to my bank account automagically, every month. As a freelance consultant, that will change dramatically. This is my plan to managing cash flow in 2020.
My Current Personal Cashflow
Currently, my finances are pretty much automated. I try to pay as much bills via direct debit as I can. By doing so, I can never forget to pay them, plus, they won’t take up mental bandwidth (of which I seem to have a chronic shortage).
The few things I have to do manually are easy to do, because I have clearly defined processes in place. For example, when I received my salary I would go through YNAB first to fill out all categories for the next month.
If you want to know how, here’s my series on how I use YNAB.
Those categories all have goals on them, which means that I can easily assign euros to each category by clicking a button. I don’t have to type in anything.
Everything leftover went into my savings, which is a combination of mostly investments and a little bit extra to my mortgage.
Business Cashflow Works Differently
Now that I’m a business owner, I won’t be receiving a nice, net salary every month. Instead, I will work some, then send invoices, then hope those invoices get paid.
And when they get paid, that’s far from a net salary. Whoah! That’s gross gross gross as money can be! (see the pun here?)
First of all, on most invoices I will bill 21% VAT. That means that for every 1,000 euros of revenue I make, I will bill 1,210. That 210 euros will be in my bank account, but they’re not mine.
Therefore, every month I’ll tally up the VAT I have to pay to the tax authority and put it away in a designated savings account. The VAT I owe to the tax man is the sum of VAT I invoiced my clients, less the VAT on things I purchased for my business.
From that savings account, I will then pay the quarterly VAT bill. The account should hold the exact amount it should have every quarter.
When you receive a salary, that’s net of all costs your employer has. As a freelancer, all costs are yours. So from the money that arrives in my bank account, I also have to pay my suppliers.
Now I won’t have that much costs, because I have no personnel, no company car, and I don’t rent an office.
The costs I have would be insurance, cell phone bill, small things like that. Once in a while there will be the web hosting bill, the costs I make for my Office 365 account etc.
It’s not much, especially not compared to my expected revenue, but still. I do have to pay them before I can touch the money myself.
Now that we have invoiced revenue, budgeted for the VAT bill, have spent money on other business related costs, hopefully I’ve turned a profit!
And of course, that profit is taxed. I have ran the numbers from 100,000 euros all the way up to 150,000 euros in profits before tax, and the expected net tax rate will be between 34% and 38%.
To be safe, I will budget 40% of my profit each month, and put that away in a separate bank account.
That bank account will accrue a lot of money (tens of thousands), which I will need because I’d have to pay my income tax yearly after the year has ended.
Only now I can pay myself. Since I will use a separate business bank account, I am able to keep my business and personal money separated pretty easily.
My plan is to accrue a buffer worth 10,000 euros in my business bank account, on top of the VAT and income tax reservations. Everything above that 10k I will pay out to my personal account.
For Monday next week, I have scheduled an article on how I will invest in my personal accounts. The article will be a slightly revisited version of my investor’s policy.
What do you think of my plan?