How to Improve Cash Flow When You Are Self-Employed

March 4, 2009

One of the most challenging aspects of freelancing and being self-employed is learning to manage your finances without a “pay day”. When you’re employed, you can pretty much count on receiving a certain amount of money on a certain day each week, every other week, or once a month. When you know this information, you can set and keep to a budget. When you are never 100% sure when your next “pay day” will be, or how much you’ll earn this month, it becomes extremely difficult to stick to a budget.

Even successful freelancers have cash flow difficulties from time to time. The most common problem is having a number of outstanding invoices. The freelancer has done the work, has sent out their invoices to collect payment, and is simply waiting for the payments to come in. Unless you have clients who pay instantly upon receipt of their invoices, chances are you’re looking at a 15 or 30 day delay on most invoices you send out (and even more for larger clients who seem to pay all of their invoices late for some reason). Here are some tips for improving your cash flow:

Billing 50/50

Instead of waiting until you’ve completed the full project for a client, you might consider billing them 50% of the total project price at the start of work and the remaining balance upon completion. This accomplishes two things – first, you get to share the risk with the client. There is nothing worse than completing a project and then not receiving payment for it. Requiring 50% of the project price at the start will show you the client is serious about the project and at the very least, you know you’ll receive at least half of the money owed. In the client’s mind, they’re not having to pay the full price before they see the completed work, so they’re happier than if you were to bill them 100% at the start of the project.

Secondly, billing 50% at the start of a project improves your cash flow. Instead of waiting for payment until you’ve completed the work (and then possibly waiting another 30 days or more for the invoice to be paid), you can add half the project price into your working budget while you’re still working on the assignment.

Extending “Financing”

For projects with a decent price-tag, you might consider setting up financing. Basically, this just means you take the total price of the project and set up installment plans for payment. If the total project will cost the client $1500, for example, you could set up four equal payments of $375. Take the first payment when you start the project and sign the contract, the second and third payments at specific milestones in the project, and the final payment upon completion.

Using installment payment plans will considerably improve your cash flow as it gives you predictable money over the course of each of your projects. It also decreases the potential for clients to wait 30 days or more to pay an invoice, because they know in advance when each of the payments will be due. You can take it a step further and require that each installment payment is made on time in order to continue working on the project under the client’s specified due date, to further encourage that payments be made on time.

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