The best piece of financial advice I was given about running a business was to start with how much money I needed for my family to live on and work backwards from that. A financial plan for your business based on your personal wealth focuses the mind.

Let me tell you about an exercise I was once encouraged to do to get to that figure. It might feel odd, but stick with me, it’s worth it.

Imagine you’ve died and you are looking down on the loved ones you have left behind. Now imagine what kind of life you would want to see them living. Are they secure in a property that has the mortgage paid and the bills settled every month? Have the children been able to fulfil dreams like college or getting married? Are their healthcare needs taken care of? How much money would it take to fulfil all those wishes?

It’s a sobering thought and one we don’t think about much. It’s very real to me right now as I’m dealing with the financial matters following my Dad’s death in February. I had to go through the figures for my Mum to make sure she had all her needs met, thankfully she has and more! Dad worked and lived to take care of those he loved far after he had gone.

Many freelancers live hand to mouth, I spoke about that in some detail in my article Small Business Owners - Are You Prepared For This?

In this article I want to take this a stage further and help to explain how to run a business where you thrive not just survive, let me repeat that Don’t run a business hoping to make enough to survive, base your finances on a plan to thrive.

Do The Math

I suggest you sit down and do these sums. These are examples based on living in the UK. Depending on where you live, the numbers could be better or worse.

• First, write down how much you want to earn per year

• Next, you need to add 30% to that number to cover tax 

• If you live in a country where medical cover isn’t free, then add a percentage for that

• Let’s do some simple maths. Let’s imagine the first number is £50,000. Add the tax pot – that’s £15,000. If you need to cover medical care, let’s call that another £5,000. We now have a total of £70,000

• Your business therefore needs to generate at least £70,000 in PROFIT (not turnover) to cover your personal expenses

• At this point you can figure out how much the business needs to turn over. In the scenario above, if you assume you’ll take four weeks of vacation, then you have 48 weeks to make at least £70,000. With rounding up, your business needs to turnover £6,000 per month, or £1,500 per week. If you charge £500 per day, then you need to work at least three days per week, every week, to generate that

• So far, we’ve not taken a single expense into account

• Let’s assume that banking, accountants and general running costs like phones etc, are £10,000 per year. You need to generate an additional £700 per month to cover that

• You may decide you want a new Mac Pro, a few mics, a new interface and some plugins. That could be around £25,000. Now you need to make nearly £9,000 per month in order to continue taking home what you need

But what if all that new gear won’t add any more income to the company? What if you could do the same work without it?

Many of our clients don’t care how we get results or the gear we use to do the work. You may have a concern that you’ll miss out on work if you don’t have certain things in place: a studio to record drums, for example, or certain software tools. But if you will only use those things a couple of times each year, that makes them a costly expense. It would be better to hire a studio to record drums. You can hire the tools you need for rare jobs. That’s how builders and other trades do it because it’s smart. They only hire a tool when they need it, and in many cases, this is costed into the job.

Financial Freedom

Look around your business and make a mental note of all the equipment you have that isn’t used 80-90% of the time. Some of that equipment could have cost thousands of pounds. You don’t use it most of the time, but it represents a couple of months of your mortgage, or several weeks where you don’t have to work. Wouldn’t you like to have that kind of freedom?

Here’s a question. How often have you looked at a new product and spent weeks waiting to buy it only to find when you purchased it that the wait was more exciting than the ownership? As one person once put it to me there’s nothing more attractive than something you can’t have.

You may not have the latest computer, the coolest car or an office in the best part of town, but your family will be taken care of and you won’t need to worry about your personal finances. I can’t underline how important all this stuff is.

I’ve seen too many businesses go bust and far too many families face crippling debt because a business owner didn’t do their sums. 

So how much money do you need to make to do more than survive in freelance audio? Only you have the answer and if you don’t know it then it’s time to do some sums.

This article contains extracts from Russ Hughes’ new book ‘The Book Dad Told Me Not To Write: You can run a better business with these simple words of wisdom. More information on the book and where to purchase can be found here.

Listen to an exclusive pre-release audio book chapter that this article is based. Soon to be released on Audible.