Nuts and Bolts of Indie Cash Flow
Or, a few things to do well before you try to go full time to build an indie business, that’ll keep you from going nuts and bolting.
1.) Set 50% of your earnings aside for taxes, in a separate account.
No, really. 50 percent. Yes, half of your gross earnings. Because you’re going to be a small business sooner or later, and are about to find out quite unpleasantly that the government takes a whole lot of your paycheck that you never even knew about when working for other folks. Because as your own business, you’re going to be paying both the business portion and the employee portion.
Incidentally, this leads to the handy rule of thumb, that an employee costs twice as much as their wages. So the folks who want $15/hr to flip burgers are, in essence, arguing that they’re worth $30/hr to their employers at a minimum. That’s why you’re seeing many low-margin businesses close, relocate, or go to robotic alternatives.
On top of federal tax, many US states slap an extra income tax on top. (This is why you see so many corporations who are incorporated in Delaware: the cost of incorporation and the taxes on Delaware business are very low, compared to many other states. But learn a lot more about the pros and cons of incorporation before you start shopping for states.)
1.a) If you don’t already have an accountant, now is the time to get one who does taxes for small businesses, freelancers, and if possible, writers. The purpose of an accountant isn’t just for filing your taxes, it’s also to help you structure your business, expenses, and deductibles in order to keep the most money and enjoy the least hassle with the IRS.
1.b.) When you are a business, the IRS demands quarterly payments instead of yearly. So that 50% of your royalties isn’t going to be sitting there as a reserve you can draw against until April – it’s going to be going out in big chunks every 3 months. And, for better or worse, you’re not paying against what you made that quarter – you’re paying against what you expect to make for the entire year, based on prior years. (Talk to your accountant for ways to mitigate this.) So your best bet is to have this in a separate account from your household (it’s better to have a separate business account anyway, for many reasons), and not count it when you’re looking at your assets and financial reserves.
2.) Figure out what you actually spend in a month, with a 3-month average.
Keep track of everything you spend. Not just the fixed expenses like rent / mortgage, or the must-pay variables like the water bill, but the entire amount of money that goes out the door in a month, from the cup of coffee you picked up while filling up your car to the 99 cent deals on Amazon, to the car repair and the vet bill after someone ate your hat decoration… again.
Why 3 months instead of 1? Because crisis happens, and three months is usually long enough for the aforementioned car repair or vet run to show up. Also, if you haven’t tracked your expenses before, seeing the totals racking up may be enough to alter your behavior for a short while, and reduce spending – but unless you stick to it with consciously for long enough that it becomes habit, you’ll revert to about the same levels as normal.
Also, this will help you start charting which of your expenses are deductible as a business.
2.a) Break out the minimum you need for surviving on a month. The “If I suddenly lost my job and had no income, how much do we need to make it through the month” figure is an important one.
3.) Figure out what health insurance will cost (for US-based authors)
If you think health insurance through an employer is bad, you MUST take some time to shop for it as a self-employed person. The true numbers, especially with the rising premiums, will both make you wince and make you revise the “when I can quit my day job” numbers.
4.) Pay off your credit cards.
Not only is this generally a wise thing to do, but when you go full time as a freelancer or small business, you’re going to need that cushion. This will also save the amount you spend in interest every month, which will let you…
5.) Save 6 months of average expenses + freelance health insurance costs in the bank. (Do not include the 50% of royalty income that’s being reserved for taxes in that total.)
The biggest problem many freelancers have is that money no longer comes in steady, measured doses, paycheck by paycheck. Money will now flow intermittently, in fits and spurts, and even if you see the sales, you won’t get the cash in hand until 2 months to 18 months later (varies from vendor to vendor as indie, as well as from publisher to publisher for trad.) So even if you’ve just released a book and it’s #52 in the kindle store, that won’t help pay this month’s rent or the emergency room bill.
Some indie authors actually form a corporation that pays them a steady paycheck, while the corporation accumulates capital; the rest of the freelance & indie world deals by having a large reserve in the bank, and drawing steadily down as the royalties and commissions pay unsteadily in. While it’d be much better to have a year’s reserve in the bank, very few people have quite that much patience.
6.) Figure out when it’s time to start looking for a job.
That figure you came up with in 2.a)? Take it, and figure out how long you think, pessimistically speaking in this economy in your area, it’s going to take you to find another job. Now, take that times the scraping-by income, and work out the bank account balance (not including the money set aside for taxes) that’s the Danger Will Robinson signal.
Many small businesses fail in their first year, for many reasons. You’re free of many of the worries of brick and mortar stores – but not all of them, and you also lack the advantages they have. You know what happens if you aren’t making enough to survive on? You keep writing, get a job, build your reserves back up, and try again. Not the end of the world, nor even the end of your world. But you need to have that line drawn in the sand before you get there, so you know when it’s time.
I have included no numbers here, because the circumstances vary wildly from author to author. Making it on your own as a family of four in Silicon Valley is going to be much, much more difficult than making it on your own as a young, healthy bachelor in rural Utah. If you’ve promised the family a vacation every summer, or you have an ailing English Mastiff whose medical bills are putting the vet’s kid through college, your own circumstances are different and your own financial requirements will be, too.