When the topic of freelance cash flow is raised, it’s easy to jump to the issue of managing incoming payments. Of course, it is vital to the success of any business. At the same time, a penny saved really does buy as much as a penny earned. Therefore, you need to look carefully both at what you are buying and at how you are buying it.
What actually is Cash Flow Forecasting?
The life of a freelancer, like any other business, requires budgeting. A significant portion of your income is based on retainers or some other form of recurring revenue, your business income will likely fluctuate. Cash flow forecasting is a way to weigh expected future income against known future expenses. Because you likely have quite a few fixed expenses — your business VAT payment, salaries, rent and so on — aggressively saving when income is good will help you survive the inevitable slump.
You may choose an annual cash flow plan, which you can always break down into monthly or weekly plans to give you a more precise overview of your business’ incomings and outgoings.
Working out your cash flow
To work out your cash flow, add up all of the payments you receive over a particular time period (such as a calendar month) and deduct your costs. Using bookkeeping software makes this easier, especially if it includes a cash flow forecast tool!
What’s tricky for freelancers and self-employed people is that no two months are the same. Looking at your immediate short-term cash flow can help you plan out the next few weeks, but when your income fluctuates it can be helpful to look at your cash flow forecast over a longer period of time – such as several consecutive months.
What should you do during periods of low income?
The advice clients to follow the three-month rule. This means you will have set aside savings that would allow you to pay bills for three months, even if you didn’t have any income during that period. If you can follow the three-month rule then great, but if not then you need to review your expenses and see what you can do to save on costs. Try to eliminate all of your unnecessary subscriptions and expenses to bring this down. If you are not able to pay bills, you could ask for a payment holiday from your mortgage supplier and credit cards, or just pay the minimum payment. You don’t want to miss payments, as this will have a negative impact on your credit score. The key is to communicate with them if you can’t meet the payments – do not bury your head in the stand.
What happens if I don’t keep on top of cash flow?
Looking at your expected turnover (the amount you make from sales) alone can give you a warm glow but comparing this to what you expect to pay out over the same time period makes sure you have a more realistic picture of your business finances. That way, you can plan accordingly and avoid the risk of spending cash that you need to pay other bills.
For example, getting a new client (especially one who pays really well) can feel like you’ve suddenly got loads of cash coming your way. But until you actually get the cash into your account, you haven’t actually got the money at all. And even when the client has paid you, you will need to deduct costs, tax, and other overheads.
Only by managing your cash flow as a freelancer can you know whether that shopping spree is really a good idea or not. It can also help you plan for other aspects of your life.
Get maximum value from your assets
Never let an asset lie idle if you can possibly avoid it. This refers to anything from your business premises (if you have them) to your equipment to your staff, to your customers. In fact, your customers are far and away your most important asset so make the most of them.
Firstly, you should always be examining both your pricing model and your prices to make sure that they are appropriate. Secondly, you should always be looking for opportunities to bring even more value to your customers for example by upselling and cross-selling.
Sales and other sources of income
How do you think your sales will look over the course of your cash flow forecast? Do you predict any issues that will affect your sales, in either a positive or negative way? For example, if your freelance business is busier in the summer and quieter over the winter, how will you deal with this?
Use existing data too and compare your sales to this time last year. Were there any unusual events (such as the pandemic) affecting your sales at all? Can you spot any trends?
Also consider if you have any large contracts coming up, or other sources of income such as a loan or grant. Are there ways you can expand the range of products or services you offer? What is the market looking like and where is it heading?
If your billing is ad hoc rather than recurring, make sure you send invoices as quickly as possible. For both ad hoc and recurring invoices make sure that the invoice is addressed to the right person. Also, make sure that it has all the details they need to approve it.
With PO invoices that should be as simple as adding the PO number. You may, however, also want to include a clear description of the goods/services. With non-PO invoices, you definitely need to be clear about what the invoice is for.
By far the easiest way to manage invoices is to invest in proper accounting software. Its many benefits include the ability to raise invoices automatically. Payments will be automatically reconciled with the respective invoices and you can automatically issue reminders if there is an issue with payment.
Always have a buffer
Always ensure you have a buffer in the bank that can tide you over should you ever face a quiet period of work or unexpected costs and expenses. Having at least a couple of months’ worth to cover your operating expenses will help you avoid financial strain and better manage your cash flow.
For example, if you rely on your laptop for work but your computer breaks, having enough money spare to fork out for a new one will ensure you don’t fall behind on commissions already lined up, without upsetting your cash flow.
It will also help keep everything afloat if a client misses a payment or you lose a large source of income.
Consider using an Accountant
If you are freelance, it’s a good idea to hire someone to help and a good accountant will take the stress out of it for you. They can help with bookkeeping, annual tax and accounts and will also provide a general financial health check. An accountant can also help you review sales reports, balance sheets, income and expenditure; all of which will assist you when it comes to managing your cash flow and preparing for the future.