As a freelancer, managing your cash flow is something you can’t really put off. With an often-unpredictable income, it can also be somewhat tricky to get right. Here we’ve put together some tips to help you manage your cash flow like a pro.
What actually is cash flow?
Cash flow is quite literally the flow of money in and out of your business account in terms of income and expenditure.
Your cash flow could be positive (i.e., your business brings in more money than it spends on outgoings), or it could sometimes be negative, with more going out than you have coming in.
Working out your cash flow
To work out your cash flow, add up all of the payments you receive over a particular time period (such as a calendar month) and deduct your costs. Using bookkeeping software makes this easier, especially if it includes a cash flow forecast tool!
What’s tricky for freelancers and self-employed people is that no two months are the same.
Looking at your immediate short-term cash flow can help you plan out the next few weeks, but when your income fluctuates it can be helpful to look at your cash flow forecast over a longer period of time – such as several consecutive months.
What happens if I don’t keep on top of cash flow?
Looking at your expected turnover (the amount you make from sales) alone can give you a warm glow, but comparing this to what you expect to pay out over the same time period makes sure you have a more realistic picture of your business finances. That way, you can plan accordingly and avoid the risk of spending cash that you need to pay other bills.
For example, getting a new client (especially one who pays really well) can feel like you’ve suddenly got loads of cash coming your way. But until you actually get the cash into your account, you haven’t actually got the money at all. And even when the client has paid you, you will need to deduct costs, tax, and other overheads.
Only by managing your cash flow as a freelancer can you know whether that shopping spree is really a good idea or not. It can also help you plan for other aspects of your life, such as getting a mortgage.
How can I improve cash flow?
Good bookkeeping has the answers! Keep meticulous records, and you’ll have more opportunities to monitor your finances and spot trends, such as the timing of any regularly occurring pinch points.
Knowledge is power, so you’ll be better able to act once you know where the potential issues are, for example:
- You realise that you sometimes order more stock than you need, and then have to pay to store the overstock. Your bookkeeping figures reveal a pattern of seasonal demand, so you can plan your orders more efficiently.
- The payment terms you offer are quite long, so you’re paying bills well before you receive the income. Shortening your payment terms relieves some of the pressure.
- Some customers have a regular habit of paying their bills late. You could introduce credit terms or an up-front payment policy to manage this.
- You realise that you’re not charging your clients enough, and end up out-of-pocket on some jobs, affecting your subsequent cash flow.
Building a cash flow forecast
Your cash flow forecast is like a roadmap of where your business is going financially over the coming few months. It’s another important way of predicting problems before they arise and hopefully shielding yourself from financial shocks.
When it comes to creating your cash flow forecast, there are a few important areas to consider:
- Sales and other sources of income
- Cost of sales, overheads, and other liabilities
Sales and other sources of income
How do you think your sales will look over the course of your cash flow forecast? Do you predict any issues that will affect your sales, in either a positive or negative way? For example, if your freelance business is busier in the summer and quieter over the winter, how will you deal with this?
Use existing data too and compare your sales to this time last year. Were there any unusual events (such as the pandemic) affecting your sales at all? Can you spot any trends?
Also consider if you have any large contracts coming up, or other sources of income such as a loan or grant. Are there ways you can expand the range of products or services you offer? What is the market looking like and where is it heading?
Cost of sales, overheads, and other liabilities
This is the other side that your cash flow forecast should cover, and it can get a bit technical sounding.
For instance, your cost of sales, sometimes called “variable costs”, might include things like buying materials, the volume of which changes based on your output. If you expect sales to reduce, do you also expect the cost of sales to drop?
Then we have overheads, also known as “fixed costs”, which need to be paid no matter what. Regardless of how much business you’re doing, these bills tend to stay the same (or stable over a longer period of time). For instance, rent and utility bills – whether you’re claiming expenses for working from home or not. So, are there any price increases coming that you need to think about? This can have a sizeable impact on your cash flow, even if your sales and turnover are healthy.
We all know the cost of living is rising but being able to accurately predict your cash flow as a freelancer is key – not least to reducing your stress levels.
Then you might have other liabilities, such as repaying a business loan or paying off a business purchase in instalments. We know it sounds like doom and gloom but planning in this sort of detail means you’re much more likely to succeed!
Find more freelance support and guidance in our info hub.