Too many freelancers feel they are on a perpetual treadmill from which they can’t escape. One reason is that they have their eye on their unpaid bills rather than on their cash flow and on their ongoing financial picture.
What is cash flow? Cash flow is as its name sounds — the flow of cash that is received and the cash that is spent during a given time period.
What good is it?
- Tracking your expenses will reward you when you go to prepare your taxes. You will find that your tax preparation time has decreased.
- You will be able to get a firmer grasp on how you spend your money, at what times of year you spend the most and the least money, and at what times of year your income comes in or doesn’t come in.
- You will be able to see how much you are spending and how much you can spend given your income.
- Once you’ve tracked your income and expenses for several years, you will be able to see if the patterns of earning and spending are consistent. If you know, for example, that January or August are usually slow, rather than sitting by the phone and waiting for it to ring when that is not going to happen, you can make your plans accordingly. You can take a vacation more confident that your business is not going to suffer.
- You can see what is owed on an average monthly basis and know that you must earn enough to cover this amount. You can see when certain larger expenses are paid each year and put money aside for them. This way you won’t always be chasing after having to pay what is due.
The first step to understanding your cash flow and your ongoing financial picture is to track your expenses and your income. This means to track and itemize every single penny spent into categories appropriate for seeing how your business runs and for preparing your taxes. While some people write down their expenses into notebooks and then transfer the amounts to spreadsheets, others find that while they still write down their cash expenses into notebooks, they use a software program such as Quickbooks for check writing and record keeping more useful. At the end of the day, they make adjustments in their software for their cash expenditures. You will make entries for income as you deposit them into your bank account which should be done as often as you find works for you.
One difficulty freelancers have is when they mix personal and business expenses. Too often people don’t have a good sense of what is being spent for business and what is being spent for personal. They spend whatever they have for either business or personal, whichever is more pressing. One solution for this is to separate out your accounts. If you have separate business and personal accounts, you can see your yearly business income after business expenses. You can then calculate a workable amount that you will able to withdraw from your business account on an ongoing basis for your personal needs.
“I have enough money but it hasn’t been paid me yet.” People often overlook that money is not in your pocket until you collect it. Too often freelancers do not try to collect their receivables. They worry that they may offend their clients or assume that they will be paid eventually. You should set up a monthly billing system where every client who owes you money gets billed. After two or more unpaid bills, you might call to discuss the unpaid amount. If an ongoing client has a history of not paying in a reasonable time, collect part of the fee up front on the next job if you can. If the client continues not to pay, perhaps the client is not going to pay and is not worth having.
People are often so busy trying to pay their bills that they don’t step back to see if they have a viable business plan, if they have been marketing their business enough, or if they have a viable business in the first place. The key is that you are in business. You are not working for someone else whose responsibility it is to meet your payroll. Every business should have a business plan which should be revisited on a periodic basis.
Tracking how you spend your money and finding out your cash flow can lead you to an understanding of how your business is going which you will find very rewarding.