4 Finance Documents Every Freelance Translator Needs
Translators don’t only need to be proficient in their target languages—they also need to be able to dabble in basic finances. Yes, even if you’re a literary or tourism translator, having some degree of financial literacy is vital. You are running a business, after all.
To get you started, today we’re going over the 4 documents that every freelance translator needs to get a good grasp on their finances.
Profit and loss statement
Sometimes this is called a P&L, sometimes it’s called an income statement. This statement shows you the revenue (gross income) and expenses of the business, and the net result (whether you’re operating at a profit or a loss).
Freelance translators usually don’t have much overhead. We have our home offices to pay, our CAT tools and maybe a couple of subscriptions (useful ones, like an accounting management tool for translators).
Most freelance translators should be operating at a profit, with expenses sitting at 30% or less of your income (according to our accountant, at least). LSP.expert provides you with a profit and loss statement, so you can always keep an eye on this part of your finances.
Profitability by client
How much are you making per client, per hour? You can know this even when you charge per word or per project. Even if you’re charging the same per-word rate for every client, there’s a chance that your profitability varies.
There are several things that could influence your profitability:
- The platform you’re translating on: you’re more profitable for a client that lets you use your favourite CAT tool than one that requires you work on complex Excel documents.
- The difficulty: some may take longer to do research, or you may need to get more creative.
You’re most likely charging differently for jobs that require more creativity or that are more difficult but having a single metric (hourly profitability) to track helps you make sense of how much you make. Combine these metrics with your performance report to learn how to quote jobs better in the future.
Cash flow statement
The cash flow statement is to help you understand your financial situation right now. Not how much you invoiced this month or how much you’re owed, but how much money you actually have in the bank.
Maybe you think it’s a great idea to buy that new computer you’ve been eyeing for the last 4 months. Plus, you know that big cheque is coming in. But we say it’s wiser to make that investment when you have the cash. You never know if a client is going to pay late or not.
A cash flow statement is basically a spreadsheet with two columns: income this month (paid—what has come in) and expenses this month.
In LSP.expert, you can see this by looking at the sales report and checking “collected” instead of “billed”.
We hope your eyes aren’t glazing over by now. Stay with us. The balance sheet is another financial document, and yes it’s different from the P&L and cash flow statement. The balance sheet is your overall financial position, whereas the P&L is your financial performance, i.e. profit earned or loss suffered by the business for the accounting period.
The main difference is that while a P&L calculates revenue and expenses within a specific period of time, and the cash flow is your given situation right at that moment, the balance sheet takes into account every financial transaction your business has made since the start, so you can understand your real overall health.
These 4 documents will help you have a clear overview of your financial situation to help you make well-informed business and financial decisions.