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Money, money, money: contractor finances

Welcome to the latest in our series of articles on making the switch from permanent to contract work.

Take a look at our first piece, helping you decide whether contract work is right for you, by clicking here. Or learn more about the operating structures available to you by clicking here.

Today we’re turning to another key element of your new contracting lifestyle – your finances.

Working without the security and clear structure of a salary is likely to be a big change. Without a clear guarantee of the size of the payment into your bank account each month, it’s critical that you take a mature and long-view approach to your finances, year-on-year, and set a target day rate that is not only realistic, but also rewarding and enough of a cushion to protect you if you work less than expected.

A common mistake made by many would-be contractors when it comes to their financial planning is to underestimate the amount of time they will spend not earning – either between contracts or on ‘unbillable work’ such as managing their company, training and personal development or – yes – managing their finances.

To set your target rates, you should not only ensure you have realistically calculated this unpaid time – not forgetting your holidays and potential sick leave! – but also  that you have spoken to people with clear visibility of what is expected in your sector, for your level of skill and experience. Of course, this includes specialist contract recruitment consultants, and we’re always delighted to advise potential contractors on where they should position themselves in the market.

Once you have made an informed decision, you can present it to potential employers firmly, clearly and confidently, safe in the knowledge that you aren’t being greedy or unrealistic.

And what if a potential employer won’t meet your rates?

There’s a lot to weigh up here. On the one hand, your rates should be an accurate reflection of your skills and experience. A company that wants to underpay you might simply be seeking someone with less to offer, and not be worth your time. On the other, if you stand to gain a fantastic reference on your CV, or six month’s unbroken contracting, it may be worth accepting a little less than normal. The key point is to fully understand – and sell – your value in the marketplace, so that decisions about which contracts to accept and reject are based on accurate information.

Then, once you’re actually earning, it’s crucial to put aside sensible amounts of money to cover your bills and other unavoidable expenses – and if you’re operating through your own limited company, these unavoidable expenses include your taxes and national insurance, as well as student loan repayments if applicable. It is sensible, therefore, to open a separate bank account in which to build up this contingency pot.

It should be clear that contractor finances are both highly personal, and dependent on strong industry knowledge. This is where a specialist recruitment agency can really help you, by giving you access to information you might not otherwise have, and helping you plan the development of your business. Because after all, if you’re contracting through a limited company, running a business is exactly what you’re doing.