Just because an invoice is now paid doesn’t mean you’re free to spend the income!

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When a client pays an invoice you don’t get to spend it all. It’s not all your money! The question is how much do you need to put aside to cover your tax bill, your costs of pitching for and delivering business and your ongoing admin/office costs?
As a really rough rule of thumb we suggest splitting it into three pots of cash (indeed it may make sense to have two accounts in addition to a current account to hold these monies). One pot is for the tax man … every time a bill is paid transfer a percentage into this account. This prevents you spending it now and not having it when you need to pay the tax man. One pot is for expenses that the business incurs … and the remainder is for you. If you are VAT registered you could do worse than having a separate pot just to hold the VAT.
How much to allocate to these pots? Well, how would it be to split every £1,000 you bill into thirds? This would give you a bit spare in your tax pot and you probably would have some spare in your expenses pot to. This excess could be reinvested into the business as marketing spend and a rainy day fund to cover the time when you need a new laptop urgently.
Pricing services delivered by others but billed by you
As the demand for your services increases you will need to bring in others to undertake some or all of the delivery. In larger projects you’ll need to consider this at the start when you are costing the project for the client. There are several approaches to this … for example you can:
–    Employ people and pay them a fixed wage
–    Subcontract the work for a pre-agree daily rate
–    Pass on the work to another and let them bill the client direct
You’ll need to consider a few things such as:
–    Who will be liable to the client for the work – you or the person you subcontract to?
–    Is this an area you will continue to do work in or a client you continue to want to work with? (in which case don’t pass on the work and do continue to be the one sending invoices to the client)
–    What does your professional indemnity insurance cover and do you need to extend it?
–    How will you agree the rate you pay to a subcontractor?
The last one of these points needs a bit more explanation of the options.
You could just pay the subcontractor the rate you would pay yourself. However this doesn’t take account of the fact that you’re the one pitching for and winning the business so you should at least take a percentage.
Alternatively you could have a discussion with the subcontractor as to what rate they’d like to be paid. If it is less than you’d charge if it were doing the work you make a profit on the difference between the two rates which is legitimate as you are still responsible to the client for the delivery of the work on time, on budget and to the same quality as you would provide. Being paid for work you don’t deliver is a good way to grow your income!
If the subcontractor is more expensive than budgetted either you have the wrong subcontractor or you need to work their prices straight in to the budget and add a percentage on for the project management.

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