Business Essentials for Freelancers

You are now fully qualified and ready to launch your new career as a freelance professional. Basically, freelance means being self-employed and earning one’s living working for a range of clients. Whilst the concept of being one’s own boss is appealing, there are still some formal legal obligations we are obliged to be aware of and understand related to income-earning activities. Our previous blog articles have covered the importance of research, planning and marketing to define how we want to work and what we want to get out of running a business. This article covers some of the financial, legal and tax requirements for operating a business in New Zealand.

Business structure

Fortunately, in New Zealand, there are few barriers to setting up a business and there is plenty of free advice about how to get started on the business.govt.nz website. Often the first part of the process is deciding your business structure as this determines the level of legal and financial obligations you’ll have.

Generally, the government advises there are three types of business:

• Sole trader – the business is part of your personal finances and you have responsibility for all income and losses.
• Company – the business is a separate legal entity with one or more owners. Losses are not usually held against the owners
• Partnership – you and your business partners share the personal responsibility for income, losses and control of the business

Business tax requirements

Being a business owner entails more than doing the activities we love. More generic skills are required, like looking after accounts, doing business forecasting, paying income tax, GST, ACC levies, and submitting annual tax returns. If we are paying other people as employees, we need to ensure compliance with superannuation requirements.

An invaluable source of information about all taxation matters is, of course, Te Tari Taake Inland Revenue, which provides up to date details about the following:

• Types of business income – how your income is taxed depends on the kind of income
• Types of business expenses – how you can claim some expenses against your income

Many people also decide that they wish to seek advice from a tax expert or accountant. Although there are fees for these services, some of the major benefits are getting assistance with preparing tax returns, identifying potential deductions and help with avoiding audits.

Negotiations and communication

Once you have established contact with potential clients, the real work of costing your work begins. This is where time spent preparing to negotiate is worthwhile to ensure what you’re offering is affordable for the client but still provides a reasonable return for your time and efforts.

According to the Xero Small Business Guide, some fundamental strategies can be employed  to ensure there are “no winners or losers” when negotiating as follows:

• Always do your homework – complete some research about your client and their business
• Don’t be too set on your prices – be prepared with an opening figure but be prepared to be flexible
• Be ready for some compromise – identify areas that you can afford to be flexible about
• Maintain a pleasant demeanour – communicate positively and avoid being aggressive

Clear communication is also critical in all aspects of customer interactions, particularly regarding essential paperwork. Before delivering services, it may pay to provide some terms and conditions about the level and quality of service clients may expect, when payments are generally due, and your expectations that you will be paid promptly. On job completion, customer invoices should clearly identify your name or your business name, the recipient of the services provided, the costs, information on whether GST applies, and details about how to make payments.

Record-keeping

According to IRD, te mau pūkete record keeping is a legal requirement, and all businesses must keep track of records of income and expenses. To meet our obligations, we need to know who we have received payments from, how much they paid, what they paid for, and when they paid. To keep things manageable, we need to develop systematic and regular habits for checking invoices, maintaining accurate records of business expenditure and storing documentation for easy retrieval. The latter can be done using hard copy storage or electronically using specially designed business management software packages. Storing documents safely and securely is also recommended as excuses are not accepted by IRD for not presenting information on time and in the correct format!

Money management

Keeping track of finances, having easy access to and understanding business figures is essential for knowing what’s going on in your business. The Business.govt.nz website again provides some valuable information on key metrics such as:

• Identifying your operating costs, e.g. outgoings for equipment, electricity, consumables, etc.
• Setting a budget, e.g. track monthly expenditure
• Staying on top of cashflow, e.g. money going in and out
• Setting aside money for unexpected costs, e.g. regular savings to cover equipment breakdown

In closing, some of the greatest investments we can make in our future business are researching and being aware of our legal obligations and setting up some sound business systems. These activities mean our business will run like a well-oiled machine, and we can focus on taking up the many business opportunities available!

If you are interested in expanding your capabilities and setting up your freelancing business, NZIBS has a range of courses that may be suitable.