As a freelancer, your income can vary from month to month, and year to year. Sometimes that’s exciting (especially when you’re suddenly making more), but other times it can be frustrating and even a little scary.
Since cash flow is the lifeline of your business, you need to manage it to stay afloat. Unfortunately, according to the WePay SMB & Money Survey, 41 percent of U.S. small business owners surveyed claimed to have struggled to manage their flow of cash over the past year. Do you need some tips on how to regulate and maintain your business funds? Read on.
What Is Cash Flow?
Simply put, it’s a measurement of money going in and out of your business. Of course, when you’re a freelancer, client payments may come in erratically, even though the due dates on your bills are always consistent. Let’s face it — it can be tough to manage.
Looking at your flow of cash is a good way to determine the overall health of your business: More money coming in than going out is good, while more going out than coming in could be a sign of trouble. After all, if you don’t have enough income to cover your expenses, you may find yourself in debt, and your business could quickly become unsustainable.
Keep in mind that there’s a difference between being cash flow positive and being profitable. When you have a positive flow of cash, the money coming in is more than the money going out, “whereas profitability is the difference between revenues and expenses.”
How to Manage It
As a business owner, you should have a solid understanding of your regular expenses. Once you know that, you should be able to project the percentage of your income that you get to save. Consider a few things: What are your current, regular monthly and annual business expenses? And what are some unexpected expenses you might be hit with, like higher-than-usual tax payments or fees associated with fixing a broken laptop? Though your income may vary each month, you can make a solid projection by taking your current expenses, project load and past income into account.
But how can you actually manage your flow of cash? You can start off by using an Excel spreadsheet to track what’s going in and out, and then use the averages to make a financial forecast for the rest of the year. Or, you can try leveraging accounting software like QuickBooks or FreshBooks to assess your situation and analyze your profits and losses. Whichever method you choose, the important part is to check in at least monthly to see where you’re at.
How to Calculate It
There are several ways you can determine your cash flow, but one popular method is to base this calculation on your operating activities. To start, take a look at your net income and subtract any depreciation or amortization. After that, subtract taxes, then add or subtract changes to your assets and liabilities. This will be your operating cash flow, which can help you assess the state of your business finances.
When reviewing your finances, you may also want to determine a specific project’s rate of return — allowing you to see how valuable a particular endeavor is to your overall income and business. To do this, you’ll need to find the internal rate of return, which will allow you to determine your break even rate. These figures will help you to assess if a project is worth continuing. When you have a higher internal rate of return, the project is more worthwhile. You can calculate your internal rate of return by completing the associated equation, using online calculators or leveraging a specific Excel formula.
Managing a Fluctuating Income
So, why does this all matter anyway? Maintaining a positive cash flow can be particularly difficult when you have a fluctuating income. If you’re struggling to manage your monthly expenses as a freelancer, there are three steps you should consider to improve your financial situation:
- Talk to your clients about potentially changing your payment schedule. For example, request bi-weekly payments instead of monthly payments.
- Sort through your business expenses and determine what’s a necessity — basically, any tools that help you remain profitable. If there are any services that aren’t contributing to your bottom line, it’s time to get rid of them.
- Charge more. When you’re a freelancer, you need to increase your rates as your business progresses so you can continue to get paid fairly for the quality of work you put out.
On top of these strategies, make sure you have a backup plan that’s ready to go when things are tight. That could mean reaching out to your freelance network for referrals, or using a business credit card to bridge the financial gap for a few days or weeks.
The Bottom Line
As a freelancer, knowing what’s coming in and going out of your business’s bank account is vital to your success. With some help from accounting software and a few calculations, you can keep tabs on your finances. And when your finances are under control, you can effectively manage your business expenses and continue to enjoy the freedom of freelancing.