Budgeting Basics for Freelancers — the Cold Hard Truth About Cash Flow
Cash flow. Doesn’t it always seem to flow out…rather than in?
Cash flow remains a constant worry when you’re a freelancer — a writer, graphic designer, or consultant of any type. In my previous article in this series of lessons learned over 15 years of freelancing, Build a Shopping Mall to Avoid the Roller Coaster, I shared a method of building your freelancing business to avoid the “roller coaster” patterns of feast or famine income. However, there is a corollary to this advice: learn budgeting basics and always have a cash cushion to buffer against periods of famine.
Budget Basics for Freelancers: Five Tips
I was never very good at budgeting. I’d spent money as fast as it came in (sometimes faster). It took many years of hard work and discipline to develop and stick to a budget. I apply this same logic to my business. These five tips will help you develop a business budget to ensure your business can withstand the typical cash flow fluctuations of the freelancer’s life.
1. Calculate Your Hourly Rate
Your hourly rate as a freelancer needs to be higher than any hourly rate you were paid as an employee of a company. As a freelancer, you will pay for your benefits, including health insurance, and you do not get paid time off. Your hourly rate must encompass these typical benefits.
2. Invoice Customers on Time
Cash flow problems often stem from a lack of incoming cash. Work out payment terms with clients before your engagement to ensure consistent cash flow. Put these terms in writing in your contract. Bill clients in a timely fashion for your work. Set up regular times each month to issue invoices. Track invoices issued on a spreadsheet or through a small business accounting program and follow up with clients who are late paying you.
3. Track Recurring Expenses
Recurring expenses are any expenses that occur on a regular basis: health insurance premiums, software license fees, and so on. Maintain a spreadsheet of recurring expenses and the month in which they are billed. Review this spreadsheet annually to ensure you are still receiving good value from each expense. For instance, you may be paying for software you no longer need, such as a theme or plugin you’ve since deleted from your website.
4. Get Paid by the Project
To make cash flow more predictable, request payment for your work by the project, not by the hour or word. Project-based payments ensure a predictable revenue stream; you can easily add up the projects and determine your monthly income. Word count and hours vary, but charging a flat rate helps keep your income steadier and predictable. (Of course, be sure you are charging fairly and receiving adequate compensation for your work and the hours invested in the project.)
5. Leave a Cash Cushion
Lastly, always leave a cash cushion in your account — a set amount that you keep in your business bank account that ensures enough money to pay necessary expenses if all work dries up for a period. What that amount is varies from person to person. That amount must include my monthly health insurance premium, website hosting fee, email account, and annual office software licensing fees. Keeping a cash cushion in your bank account provides practical and psychological benefits. From a practical standpoint, you won’t have to take any project (including those soul-draining ones that we all loathe) but can pick and choose your projects if you have enough cash reserves on hand to pay immediate expenses. Psychologically, you’ll feel more confident negotiating with clients if you know you have “money in the bank” to fall back on; you won’t give in too quickly to quirky client demands or lower offers.
Running a freelance business is just like running any other business when it comes to accounting and financial management. Your cash flow in must exceed cash flow out to net a profit. If you’re constantly struggling to pay necessary bills or wondering when you can issue yourself a paycheck, it’s time to refresh yourself on the basics.
There are many resources to help you learn the basics of small business accounting if you still need help. Two that are free and nationally available in the United States include:
- The Small Business Administration — the SBA’s online business guide offers dozens of well-written articles from seasoned business people to help you navigate the small business and startup nuts and bolts like accounting and finance.
- SCORE — SCORE is an organization powered by retired business executives who volunteer their time to mentor business owners. You can request a mentor at any stage of company growth, from startup to expansion.
It’s tempting to pocket every paycheck and comingle business and personal expenses if you’re self-employed, especially if you’re a sole proprietor. But keeping business and personal finances separate, and ensuring you’re tracking both to achieve your goals, is essential for long-term freelancing success. With the right approach, you may find you do have enough cash at the end of the month to pay your bills and then some. For long-term financial success as a freelancer, it’s imperative to understand basic accounting and take simple steps to manage cash flow.
Lessons Learned from 15 Years as a Freelancer
If you missed any previous lessons, catch up using the links below. This series celebrates my content marketing agency’s 15th anniversary. I share lessons learned from my 15 years of thriving as a freelancer. Start anywhere you like in the series; each article can be read independent or as needed.
Lesson 3: Can You Make It as a Freelancer?
Lesson 4: Choose a Micro Niche for Maximum Impact
Lesson 5: The Importance of Personal Branding
Lesson 6: Protect Your Online Reputation
Lesson 8: Build a Shopping Mall to Avoid the Roller Coaster
Lesson 9: Never Work for Free (or On Spec)
Lesson 10: Freelancers Need a Plan for Time Off
Lesson 12: Budgeting Basics for Freelancers (you are here)
Serious about success? Then find and follow someone successful. Follow me. Jeanne — Medium