9 business terms all freelance designers must know to succeed

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Taking the plunge into freelancing is scary – we all know that.

One of the reasons we’re so afraid is that we’re great designers but often know little about running a business (and that’s why many businesses fail).

So to help you take your very first steps toward business prowess, I’ve compiled a list of business terms all freelance designers should know.

After reading the list, leave a comment on this post and let me know which business terms I left out of the list or which ones you found most useful!

Return on Investment (ROI)

The efficiency of an investment, or the comparison of efficiencies of a number of different investments.

In layman’s terms: Is the money or time you’re spending going to be worth it?

Example: Your website costs you $100 per year for hosting, and let’s say you put $500 worth of time into redesigning it (after checking out these 50 design portfolios for inspiration).

After the redesign, you received 3 new clients who loved your website and hired you, and combined they paid you $1500. So you put in $600, received $1500, and your ROI is $1500-$600=$900.

Not bad speaking as a percentage.

Business-to-Business (B2B)

Commerce transactions between businesses.

In layman’s terms: Selling to other businesses (rather than consumers or government).

Example: For the most part, we as design freelancers are B2B businesses. We sell our services to other businesses rather than to consumers, with a few exceptions (see below).

Business-to-Consumer (B2C)

The sale of goods and services from businesses to the end-user.

In layman’s terms: Selling to people (think retail).

Example: You gain a client that wants wedding invitations and save-the-date reminders for her own personal wedding. This would be a B2C transaction because your client is going to use them, not sell them to someone else.

Business Plan

A formal statement of a set of business goals, the reasons they are believed attainable, and the plan for reaching those goals.

In layman’s terms: Your goals and how you intend to achieve them.

Example: As freelance designers, we are rarely required to complete a business plan because we aren’t pitching our business to potential investors or bank personnel for a loan. However, an informal business plan that defines your business goals can be a vital tool for you to understand what success means to you and what concrete steps you can take to create that success.

Profit

The difference between a business’ total revenue and all costs.

In layman’s terms: How much money you have left over after you’ve paid all of your expenses.

Example: You charge $800 for a brochure that costs you $500 to produce. Your profit is $300 (read here on how to  hugely increase your margins with small tweaks).

Profit Margin

A ratio of profitability calculated by finding the net profit as a percentage of revenue. Profit margin = (Revenue – Cost)/Revenue * 100.

In layman’s terms: The percentage of how much profit you make. A higher profit margin (bigger percentage) means you made more profit, but it also might mean that you’re gouging your clients.

Example: You create a business identity for $1500. It costs you $1000 in time to produce the awesome result. Your profit margin for the business identity is 33% = ($1500-$1000)/$1500 * 100.

Why does profit margin matter?

By calculating the average profit margin you make on different types of projects (or for different clients), you can see what projects (or clients) make the most profit as a percentage.

For example, if websites typically provide a project margin of 33% while posters provide only 10%, you might look to market website design more aggressively than poster design because you make more profit margin on websites.

Vendor

A person or business that sells to your business.

In layman’s terms: A person or business who you purchase goods and/or services from.

Example: You buy office supplies at Target; Target is a vendor. You purchase web hosting at Dreamhost (which is what GDB uses); they’re a vendor.

Liabilities

An obligation arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yield of economic benefits in the future.

In layman’s terms: Debts and obligations your business owes to others.

Example: Your business credit card bill, payments to your vendors (which can be subcontractors), or utility bills.

Invoice

A commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided to the buyer.

In layman’s terms: The bill.

Example: You send invoices to your clients asking them to pay the amount owed to you. Your vendors, in turn, send you invoices asking for your payment.

More great links for getting started

Did I leave anything out? Leave a comment and let me know.

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Comments

  1. says

    Cash Flow

    A revenue or expense stream that changes a cash account over a given period.

    In layman’s terms: The difference between how LONG it takes your clients to pay you versus how LITTLE time you have to pay your bills.

    Example: Your clients takes 30 days to pay your bill for the brochures you printed but your supplier expects payment in 10 days.

    If you don’t have enough cash to cover the spread, you WILL BE out of business really fast. Negative cash flow has killed more PROFITABLE businesses than probably any other factor.

  2. says

    Preston, Wishing you a Happy New Year first of all. Great article I must say and freelancers like me hardly bother to deeply study these terms which we should. After all these are the backbone of our business. From all the terms you mentioned above, I love INVOICE because it get me money for my hard work and everything comes after that :)

  3. says

    Regarding business terms every freelancer ought to know: I’m glad you included “invoice” because as one who teaches law for visual artists I am amazed at how many students don’t know what an invoice is. I know this list can go on forever (defeating the short list aspect of it) but I might include “term(s)”, and a few copyright terms such as “fair use” and “work (made) for hire”. – Thanks

    • says

      Joel,

      Great additions – an “advanced” list seems to be a popular idea, so I’ll keep those in mind. I’m also putting together a list of legal terms, and those might go really well there.

      Thanks for sharing!

  4. says

    I agree that ever freelancer needs to know these terms to be successful and to incorporate them in their daily lives. Writing things down help you stay on track and consistent. Having a TOA or a invoice laying everything out from communication to payment method.

  5. Jim Ranes says

    April, good post. One term I would add is “Opportunity Cost”

    From wikipedia: “Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen).”

    It is related to ROI and Profit Margin, but unique in that it is mostly about how there are only so many hours in a day.

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