Working a salaried job can have its downsides, but at least there is a steady paycheck. Often, there are benefits and perks, like free coffee, a company car and access to expense accounts and business cards.
But when you make a living on your own, you have to provide all of that—coffee, healthcare, etc.—for yourself. Of course, you also have to manage your cash flow and find working capital so that you can run your business. (And it doesn't matter if a paycheck shows up two or three weeks later than you had expected.)
That isn't easy.
“Cash flow is always a huge problem for self-employed individuals. The mortgage is due whether your customers pay you on time or not," says Karen Castle, a certified public accountant who owns Castle Business Accounting in Olney, Maryland.
But working side gigs and contract jobs can be done successfully, especially if you master budgeting. (In some ways, budgeting when you have a side hustle may be harder than the actual work itself.) So if you're looking for ways to keep from having a cash-flow crisis and budget better, you may want to keep a few things in mind.
1. Make sure you have the right tools.
It's hard to make your budget work if you don't have the correct equipment. You'll probably want:
- A business checking account to keep your business expenses separate from your personal.
- A savings account to put something away for later.
- A business charge or credit card to help with your cash flow. Business cards can help you manage cash flow, provided you have a decent stable of clients and know you have income coming in. (If you don't have that yet, you may want to wait to apply for a card.)
- A business line of credit to help with working capital or emergencies. (Or you may want to take out some small-business loans.)
“The best advice I can give is to make sure you have a line of credit in case you need it when clients are slow to pay or there is no work," says Beth Carter, who owns Carter Consultants, Ltd., a recruiting services business based out of Warren, Rhode Island.Carter's $6,000 line of business credit has been very helpful, but she has also been self-employed since 1991 and has a long track record of having clients and contract work. If you've just launched a self-employed career, getting a line of credit or small-business loans right now may be way too premature.
I get clients to pay up front for certain services... so that I don't have to wait X-period of time.
—Beth Carter, owner, Carter Consultants, Ltd.
Castle agrees that small-business loans or a line of business credit “can be a lifesaver." But it can also be an anchor, if you aren't financially disciplined, she says.
“If you need to borrow a few thousand dollars this week, but you know you have a big customer payment coming in next week, make sure repaying the line of credit is your top priority," Castle advises. "Ideally, your balance will always be as close to zero as possible, and you will borrow money for the minimum number of days necessary.
“The last thing you want to do," she continues, "is spend your line of credit and now be both short on cash and in debt."
2. Plan ahead.
Especially for those just starting out, Castle recommends creating several budgets to map out where you expect your business to go—a realistic budget, a worst-case scenario one and a wildly successful spending plan.
“In a worst-case scenario, what expenses are the first to get cut?" she asks. “If you are wildly successful, what will you reinvest in the company or take the money for yourself? And if things go as expected, a realistic budget will help you steer your business in the right direction."
But don't get too wedded to any of your budgets, Castle cautions.
“Things happen. Situations change," she says.
She suggests cash-flow forecasting, where you're always looking ahead and trying to make predictions and monitoring your bank accounts, as well as using a cash-flow software program.
Another thing to think about as you plan ahead and try to stay on top of your cash flow and hoard your working capital? Paying bills now out of your checking account or with your business cards, while you have money.
“There is seasonality to some of my work," Carter says. “Executive recruiting and training tend to slow down in the summer and the two weeks around Christmas. So I try to pre-pay any bills that would land during that time. This way if I happen to have work during that time, it's a bonus to me."
3. Pay yourself—and the IRS.
These are two areas that can be tough for contract workers and the self-employed. After all, as Castle said, the mortgage is due no matter what. So is your electric bill, your cell phone bill and so on.
While it's tempting to ignore your savings account and those estimated taxes, you do so at your own financial peril. Ryan Vet, a dental consultant in Durham, North Carolina, has been freelancing off and on for about 15 years, and has had side gigs even when he was working full-time.
“Making sure you pay quarterly taxes as well as setting aside enough for taxes is critical," he says. "I think every freelancer's jaw hits the ground the first year they have to pay their tax bill. Be sure to always set aside more than you need,"
How much should you put aside?
Jacob Dayan, CEO and co-founder of the accounting and tax services websites Community Tax and Finance Pal suggests setting aside 25 to 30 percent of your income into a separate bank account, so that “it's already taken care of and you won't have to worry about where the money is coming from."
But you also need to be putting money away into a savings account, so you can pay yourself later, if you need to.
Sock away money for the day your mechanic advises you that you need to replace four tires. Put away cash in case you learn your biggest client just went out of business. Sure, business cards or business line of credit can help with those scenarios, too, but it's never a bad idea to also put money away. What if you need tires the week that you lose a big client?
“When you're a freelancer or small-business owner, it can feel like money is just going in and out all the time," says Stefan Palios, an entrepreneur, writer and speaker based out of Toronto.
Still, he says, even if you're horrified by all the money that's disappearing from your bank account, it's important to make sure money is going into your savings account consistently.
“Continue to pay yourself first with automatic savings deposits, so if you really find you're run dry, you have an emergency fund sitting on the side," he says.
4. Create your own system for budgeting.
You can have the best budget for your business, ever, but it won't matter much if you're continually undermining it. If you aren't bringing in more clients, or forgetting to invoice clients, you could be relying on business cards more than you intended as well as sabotaging your cash flow and running out of working capital pretty quickly.
Come up with a system that you can follow, whether things are busy or slow—and come up with “rules" that work well for your revenue stream. The following can help you get started:
Look for more regular clients.
Maybe your budget is often shaky because you don't have enough dependable work.
“I'm willing to give discounts for longer-term contracts, meaning that I work on retainers instead of projects. This at least ensures that I am invoicing every month," Palios says.
Try to not invoice everyone all at once.
“If I only invoiced at the end of the month, I'd be setting myself up for a dry spell," Palios says.
Granted, these aren't hard and fast rules. You may find that your clients all pay at different speeds, and that invoicing once a month is fine. But if you do have dry spells, you may want to look at how you're invoicing clients or how customers pay you.
Ask clients to pay upfront.
“I get clients to pay up front for certain services, such as resume writing and coaching, so that I don't have to wait X-period of time," Carter says.
In some cases, you may have 30 to 60-day delays. If you know that's likely, you'll want to factor that in as well, she says.
Make sure those invoices are going out.
Of course, not every contractor has invoices to send—some are paid at the point of sale. But if your business model requires you to send out invoices, make sure you don't neglect that. If you do, you may find yourself running out of working capital.
Forgetting to invoice clients may sound nuts (we all love getting paid, right?), but it's easy to do, if you're flooded with work.
“Too many people like doing their thing but hate the finance piece so much they don't even bill often enough," says Donna King, a financial consultant who owns Beyond Balanced Books and lives in Mission, British Columbia.
King says that when you bill later than you should, you're making it easier for clients to not pay you.
“People are happy to pay soon after they receive the work. Not so much when you bill three months later. For some reason they no longer see the value in it," she says.
King suggests putting a 10-day window of time on your invoices.
“Thirty-day terms not only harms your cash flow, but it also sets a different late mindset," she says.
King points out that a lot of people may pay late anyway, and if you ask to be paid within 30 days, you'll have some clients who stretch that out to 40 or more. It's like speed limits on the freeway, she says.
So consider tweaking your terms on your invoice may help. And if not, well, that's what an emergency savings account, small-business loans and business cards are for. After all, you need to have some way to pay that mortgage on time and supply your own coffee.
Read more articles on cash flow.
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