Cashflow: the hidden killer for freelancers
I’ve been a fulltime freelancer for over three years and in that time, I’ve changed from being quite shy about the topic of money and charging clients to being very upfront and realistic but, even now, one of the hardest concepts is cashflow management.
No-one ever really talks to you about cashflow before you go freelance and whenever I’ve worked onsite at agencies, the attitude from some inhouse developers is that freelancers are coining it in. Whilst it is true that you can make more more by freelancing the fact that your cashflow is so up and down means that if can rarely feel that way.
In fact, I’ve met lots of people on the cusp of going freelance who haven’t saved up at all and haven’t realised that their first freelance payment may be months away.
My revenue and expenses for the past 3 tax years
See those big green spikes? They’re the good times; they represent the fruition of month’s of hard work; times when I went for celebratory meals at (slightly) expensive restaurants with people I loved. However, those green troughs represent some of the worst moments of my life; times when I was working really hard but knowing I would not receive a penny for months to come; times when I was buying smartprice beans in ASDA and wondering if I’d be able to pay the mortgage that month.
Most companies have payment terms of 30 days. That means, that 30 days after you complete the job you get paid. If the job takes one month then this means you get paid a full two months after starting the job. Some businesses have payment terms of 45 days, 60 days or more and honestly, if you can avoid working for these guys then do.
However, if you can negotiate them down to 30 days or lower than that’s great and, yes, it can be done because I have done it with some of Manchester’s most notorious agencies.
In reality 30 day terms means, that after 30 days your client’s accounts department will tell you:
- they never received the invoice or they lost it so you need to resend it
- you just missed the payment run but there’s another one in 30 days
- the guy who pays the invoices is on holiday this week and will be back in next week
It’s important to remind accounts people at least a week before your invoice is due so those excuses don’t get trotted out on the day the invoice is due.
One of the ways that I’ve attempted to try and sort out my cashflow is to start taking upfront payments of (usually) 50% for larger scale jobs – that is to say jobs that will take a month or longer. In fact, when working with direct clients I try to do this for all jobs regardless of size/duration.
Also, I try to request payment terms of 15 days maximum. A lot of the time, I have no say over this as clients often dictate the payment terms and don’t allow me to shorten them but, sometimes, as mentioned previously, they do so it’s always worth trying.
If I work with digital agencies for day-rate priced projects spanning months then I often ask to invoice at the end of every month. When I first started out I’d wait until the end of a 3 month project then invoice – which was foolish of me.
The other way to manage cashflow is to maintain a sizeable cash reserve in my business bank account. Personally, I try to keep 3 month’s minimal pay in there at all times so I can survive for 3 months if the worst (or let’s face it the usual) happens. Of course, doing this means I’m constantly squirrelling away money as opposed to spending it on anything. My bank manger probably loves me.
There are some direct clients and digital agencies who are fantastic payers. These people pay on time without have to be strong-armed or sweet-talked into doing so. In return, they get first refusal on my time, they get preferential treatment and they get respect. It’s important to find yourself clients like this – they do exist.
Another mistake I made when starting freelancing was to pay myself as and when I got paid by clients. Now however, I try to treat myself as an employee and pay myself the same amount at the same time each month. This is really difficult to do but very important to maintain a level of stability and realism in my life.
3 years in and I still struggle with cashflow from time to time. It does get easier but I think it will always be an issue as a small business owner.
Are you a freelancer or business owner? Do you have any tips for managing your cashflow that you’d like to share in the comments?
Note: Comments are now closed