One of the consequences of the uneven flow of work for independent web workers is an uneven flow of money. If your work is subject to the contractor’s “feast or famine” schedule, your bank account can feel the same effects. This is nice when you’re suddenly flush – but not so nice when you’re reduced to eating ramen noodles three times a day.
In addition to wearing all of the other hats for your business, as an independent you also get to be Chief Financial Officer. Among other things, that means keeping an active eye on your cash flow, and taking active steps to manage it. Here are five things you should be doing to help ease the pain.1. Separate your business and personal cash. This is mostly just good accounting sense, but it can also help you keep track of your actual cash needs. Rather than treating the business account as a pot to dip into whenever you need money, keep it separate and write yourself paychecks (which might also be classed as loans; talk to your accountant to find out the best way to handle paying yourself). If you find yourself needing to skip paychecks because there’s no money, it’s a sign that you’re being overly optimistic about what you’re taking out.
2. Save for a rainy day. Or a no-work month, as the case may be. The holy grail of small business startups is six months of operating cash in the bank, though that can be tough when you’re tiny. But even if you’re small, you ought to be able to skim 5% off the top of every incoming check and save it away. When the numbers build up, make sure this ends up in an interest-bearing account (also belonging to the business, of course). If you have a tough month, you can tap the savings to keep going – but be sure to pay yourself back as quickly as you can.
3. Use terms to move payments forward. By definition, you’re not a huge business who can afford to carry a big amount in the “accounts receivable” column. But unless you tell them differently, customers will assume they have 30 days to pay. Negotiate your terms up front: most clients will go for 15 days without much fuss. You might also want to offer a small discount (2%) for payment when the invoice is received. Be sure to create invoices that will help you get paid promptly, and don’t be afraid to send invoice reminders.
4. Credit cards are a dangerous way to smooth out the ups and downs. Almost any business can get a small business credit card, and it seems like that would be a good way to cover expenses during the lean month. And it can – if you are absolutely certain you can pay the balance off quickly. Otherwise, you get to add interest payments to an already-bad situation. If you lack the discipline to use a card responsibly, think about a business Amex instead of Mastercard or Visa. They’ll charge you an annual fee, but they’ll also be relentless about making you pay them off in a month.
5. Plan for the big expenses. There are some expenses that you can predict in advance – for example, depending on your business structure, you may have one big tax payment to make in January. If you know you’re going to have a larger-than-usual expense, start setting aside money for it months in advance. The bite will be the same, but the pain will be less – and you’ll be assured of having the money when you actually need it.
What other tips do you have for juggling cashflow for contractors and designers just starting out on their own?
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