You could invest an indefinite amount of time in learning business terms. In this article are the key financial terms and descriptions every freelancer should know to hit the ground running. After all, the acquisition of knowledge is important and a well known moniker of success.
Upon understanding these terms lies the foundation of your business acumen — your ability to navigate the business world like a pro. If you're already an experienced freelancer or considering starting a freelance career, you're in the right place.
Let’s get into it ...
1. Accounting
Accounting is, and always will be, the backbone of your freelancing business and the financial decisions you make (not to be confused with bookkeeping). Accounting affects all aspects of business: taxes, tax deductions, budgets, net earnings, and it can tell the story of the overall health of your business — make sure to understand the basics and even more advanced terms.
Companysuggestion.com lists the principles of accounting as:
- Understandability: understanding financial reports is imperative to critical decision making and monitoring.
- Relevance: financial reports need only relevant data, allowing well-informed decision making.
- Consistency: aids credibility and reliability of company financials. Anomalous and unexpected transactions month-to-month may indicate nefarious or reckless action.
- Comparability: comparing similar businesses within the same industry — freelancers in this case. Similar work should have similar results, forgoing any outlier data.
- Reliability: financial documents need to be accurate. People rely on them to make important decisions, so take care to ensure it is done correctly.
- Objectivity: information entered is accurate, uninfluenced by internal and external bias.
Those drawn to entrepreneurial endeavors tend to have a specific personality type: risk takers, visionaries, and those with the gumption to blaze unknown trails…They also tend not to like boring, pesky and mundane accounting tasks.
Fear not, daring trailblazer! For the lackluster (but vastly important) principles of accounting don’t have to be your solo duty, thanks to Xolo!
2. Bookkeeping
Bookkeeping is sometimes used interchangeably with accounting, and it’s important to know there’s a difference. Accounting covers all parts of a business’ finances in larger, specified time frames. Bookkeeping records and manages day-to-day transactions — which is more common with POA (point of sale) businesses. Freelancers deal less in POA and more in periodic invoicing and accounting.
3. Invoice
Invoices are how freelancers (and businesses) collect payment for products and/or services provided. It’s beneficial to both parties in many ways; freelancers potentially end up with more money in their pocket, and larger companies can forgo long-term employment contracts for isolated tasks.
The following elements should be present in every invoice:
- The word “invoice” (no joke, it needs to be there).
- Invoice number (this helps you keep track and provide clients with a reference number for payment).
- Date of services rendered.
- Payment due date.
- Your name (or company name).
- Name of client (or company) being billed.
- Bank account details (it should be clear how to pay/settle the invoice).
- Itemized description and cost of products or services rendered.
- Applicable tax rates (VAT, etc.)
- A note section (state late fee terms and conditions, etc.).
- Total cost of products or services (nice and bold — make it easy for people to pay you).
Though it may seem like a lot, all eleven of these points can be easily handled in mere minutes with Xolo Go’s invoicing service for freelancers (you don’t even have to pay to send an invoice). Let Xolo guide you through proper and compliant invoice creation, and even auto-calculate VAT for ya, provide you a business bank account (IBAN) for payment collection, and more…
Cue the fireworks 🎇
Xolo Go offers top-notch invoicing solutions allowing you to invoice like a company without owning one.
4. VAT compliant invoice
Europa.eu states, “When VAT (value added tax) is charged on goods or services, the term 'taxable supplies' may be used. If you are in business and you supply goods or services, you normally have to:
- register with the tax authorities in the EU country where your business is established;
- charge your customer VAT and account for this to the tax authorities.”
Operating a business within the European Union (EU) or the European Economic Area (EEA) requires VAT registration. VAT is normally included in the invoice total, with payment being made automatically, and the reporting responsibility lying with the recipient. If you’re curious, check out How to invoice a company as an individual 👀 and read more on VAT rules and directives set out by the European Commission.
Adhering to VAT compliance (invoicing or otherwise) is a legal requirement and highlights a personal and professional commitment to sound business practices. With clients and governmental departments alike, it reinforces transparency and builds long-lasting trust. In a sense, it goes beyond everyday business operations and lends heavily to your reputation as a business and a professional within your industry.
Elevate your freelance game with Xolo Go: Seamlessly create and send VAT-compliant invoices hassle-free!
5. Tax residency
Living and operating exclusively within one country simplifies the topic of tax residency — follow your country's tax laws and you can’t go wrong. If you seek to branch out internationally and travel while you work, take note of additional tax requirements in countries you intend to operate (and live) in because tax residency is sneaky and easily overlooked. Thankfully, it’s easy to avoid an unexpected tax hit if you know how you intend to operate your freelance business.
If you’re interested in Estonian e-Residency, The ultimate guide to paying taxes for your Estonian company contains the information to help you get started.
🤩 While you’re at it — Boom! Xolo Leap: Run an e-Residency company from anywhere on the planet.
6. Cash flow
Just as blood pumps through your body, so does cash through your business (ideally). The term describes the measurement of revenue and expenses and the availability of funds at any given time — money in and money out. When you’ve more money in than out, you’ve a positive cash flow; when you’ve more money out than in, you’ve a negative cash flow. Good bookkeeping and budgeting are how you manage cash flow properly, bringing us to the next term on the list…
7. Budgeting
It’s one of those things that’s boring and yet so intrinsically important. Budgeting is the bumper guards at a bowling alley, and the ball is you and your business reaching its goal (the pins). Understanding how to assess the requirements of your freelance business, your niche and where you invest in yourself or others will define how you budget. Check out these 3 money tips for freelancers.
In short, the budgeting framework looks something like this:
- Decide necessary expenses
- Remove what isn’t
- Continuously review as time goes on (you can’t plan for everything)
- Think purchases through (critically)
- Rinse, wash, repeat.
8. Expense management
Wait a minute, this is budgeting with extra steps! Indeed. The two go hand-in-hand to manage cash flow effectively.
Budgeting is the planning and careful allocation of the expected use of funds. Expense management is the real time management of the actual expenses incurred (remember, you can’t plan for everything), deciding how and from where to adjust the budget accordingly.
Example: you expected to upgrade that one software program this month; turns out the new version you needed is way more expensive than you budgeted for — this is expense management in a nutshell. Learn more about managing finances as a freelancer here.
9. Savings
Savings are called savings because they save you in a pinch. It’s simple to understand, and so incredibly necessary to have. Regarding the business term however, savings means two things: money collected and saved for another time/purpose, and economical use of or reduction in cost, time or other resource.
Saving for another time
If a three-sided coin existed, on it you would find: budgeting, expense management, and savings. Each impacts the other and helps you run your business when properly implemented. If you’re not good at it right now don’t worry, these are all easily developable skills.
Reduction in cost, time and other resources
This form of saving comes down to various factors such as planning, negotiation, timing... Critical thinking and analysis (also easily developed skills) will help you identify opportunities to be economical where it matters most, ultimately saving you time, money and other finite resources that you use to run your business.
10. Payment terms
Between every freelancer and client are agreed-upon conditions under which a freelancer completes work and receives compensation. These terms are typically discussed and outlined before the freelancing project begins and are documented in a contract (formally) or other agreement (informal, such as an email) to avoid any misunderstandings or payment disputes.
In freelancing, "payment terms" refer to the agreed-upon conditions and schedule under which a freelancer will be compensated for their work or services by the client or employer. These terms are typically discussed and outlined before the freelancing project begins and are documented in a contract or agreement to avoid any misunderstandings or payment disputes.
Items included within the payment terms will differ from client to client, but often include the following:
- Payment Method
- Payment schedule
- Payment amount
- Invoice submission
- Due date
- Late payment penalty (interest)
- Retainers or deposits
- Revisions and disputes
- Cancellation and termination
- Reimbursable expenses
Payment terms are a two-way street, meaning it’s an agreement between the freelancer and client. Should anything important (to you) be missing from the terms, don’t hesitate to speak up — avoiding potential miscommunications or misunderstandings is always a good (and you shine as professional you are).
Set late payment interest rates and more with Xolo Go!
11. Reimbursable expenses
“Reimbursable expenses” is one of the items found and discussed within the payment terms. If it’s not, give due consideration and openly discuss reimbursable expenses with the client. The purpose being to clarify responsibility of certain expenses to complete a job, and how those expenses will be reimbursed. What those expenses could be are numerous, to say the least, and will depend on your niche, your skills, the job, the client — any or all of them at once or individually.
Here’s a few examples you might consider in your next gig:
- Travel expenses
- Software tools and licenses
- Printing and materials
- Communication expenses
- Research expenses
- Miscellaneous expenses
The key here is to be professional and sincere when highlighting this topic. Get more insight on reimbursable expenses for freelancers here.
12. Escrow account
Escrow always sounded like one of those words I would never understand even if I looked it up. The reality is that escrow is a simple concept: a third-party account that holds the client's payment until the freelancer fulfills the agreed-upon terms of the project. It may not always be something you come across in your freelancing career, but something you should be familiar with nonetheless.
Escrow is beneficial for both parties. For freelancers it means payment security, client commitment, dispute protection, timely payment, trust building and mitigates scamming. If you plan on working internationally, you will likely come across this term and the use of escrow accounts.
13. Tax deduction
Tax deductions are one of the great benefits of running a business. They are the expenses that freelancers can deduct from their income to reduce their taxable income and lower tax liabilities.
Example: if you use a car to complete your work, meet clients, or is affiliated with your business in any way, things like car payments, fuel costs, and maintenance are potential tax deductions you may claim. Likewise, if you have a dedicated space in your home or apartment, you can also deduct the square meter cost of it as a tax deduction.
Disclaimer: this isn’t financial advice. You should always do your research and seek counsel from a certified tax and/or accounting professional, or…
Use Xolo Go to report your freelance business expenses with professional accountants by your side!
In conclusion
Understanding these terms is crucial to support your professional journey. As mentioned at the beginning of the article, you can dive into each term separately and attain expert-level knowledge (if that’s what you need). I'm delighted to inform you that it's not a requirement. You can effectively and successfully manage your freelance business by gaining a foundational understanding of all the terms and concepts discussed here.
If you come across the need for more knowledge along the way, that's when you can focus on it. Otherwise, just keep moving, keep working, and keep succeeding.
Strategic plug! To keep your momentum at its peak, Xolo provides all the tools you need for managing business administration: invoicing, business expense reporting, and even remote business registration. Signing up takes just 10 minutes, and you'll be well on your way to becoming an international freelancing powerhouse!
About Alexander
Alexander is a former US Army logistics management coordinator and attended the Estonian Entrepreneurship University of Applied Sciences from 2019 to 2022, studying entrepreneurial behavior, creativity, and business innovation. Since 2015, he has worked for Estonian finance technology and banking companies in customer support and data governance roles. His previous writing experience includes contributing articles within the cryptocurrency space, academia, and personal creative ventures. In his free time, Alexander enjoys connecting with friends and family, slayin' noobs in Destiny, and reading (if he sits down long enough).