Manage Your Cash Flow, Make Your Income More Predictable

Jan 24

Two people with their laptops reviewing a cash flow document.

Whether you’re a solo freelancer or an agency, your business generates three critical financial documents:

Cash Flow Statement
Income Statement aka Profit and Loss
Balance Sheet

If you have a bookkeeper or accountant, or you’re using any of the popular accounting packages, you can generate these statements at any time.

In my agency, I’d get them twice a month.

The Cash Flow Statement is About “Money in the Bank”

For most small companies, the Cash Flow Statement is the most important simply because it’s the most immediate. It’s all about “money in the bank”.

It tells you how much cash there was at the beginning of the statement, how much came in during the defined period, how much went out, and how much is left.

Note that it doesn’t tell you how profitable you are or how much you have in outstanding receivables (the other statements tell you that). As the name suggests, this is all about cash flow: money in your account, money leaving your account.

Your Goal: Smooth the Bumps Out of Your Cash Flow

Let’s say you’re a freelance writer, and last year your gross billing was $72,000. That’s an average of $6,000 a month. But I’ll bet that’s not what your cash flow statements would show.

Most freelancers who billed $72,000 will have some months at $10,000 and others at $2,000. That still averages to $6,000 per month.

Note that you could have been equally busy in both months, but during the $2,000 month, you had lots of outstanding receivables. Yes, the money is good once you collect it, but until it’s in your bank account, it won’t show up in your cash flow. And that means you can’t spend it.

Ideally, you don’t want to bounce back and forth between feeling rich and feeling broke. Maybe you don’t want to be an employee, but having a dependable paycheck is a good feeling.

Let’s find ways to smooth out the bumps.

Put Your Cash Flow Statements to Work For You

Do this: generate separate monthly cash flow statements for the last year. Now study them.

Do they make sense to you? Do you know why some months are much higher than others?

Does your cash flow seem randomly bumpy, or is there a seasonal element? For example, some businesses are predictably slow in the summer and then pick up again in the fall.

If you already know that some months will be soft, you could plan for that.

Take some time to think about the numbers. If the last year wasn’t typical, or you just want to see how you’ve progressed, generate monthly cash flow statements for the previous year. Now you can compare the same months of different years to look for patterns.

It’s good to get a feel for your cash flow so you can take steps to make it more predictable.

Based on Cash Flow, Pay Yourself Like an Employee

Ideally, you should have a separate bank account for your business apart from your personal account. Depending on where you live, you may need to create a legal structure for your business to get such an account.

In Canada, even sole proprietors can easily open business bank accounts with basic ID.

Now, with a separate account, bill your company regularly, like a salary. This will force some discipline into your finances.

Rather than “spend it as soon as you get it”, you bill your company $X every two weeks (or whatever makes sense) and leave the rest in the bank. So, how much is $X?

Let’s get back to the $72,000 a year or $6,000 a month. If you work from home, your expenses are minimal: internet, phone, maybe travel, coffee (yes, coffee, save those receipts). But still, you do have expenses, so you need to set money aside for them.

Then, you want to build up a cushion in your account for the slow periods. Let’s say, two months’ average, or $12,000.

Once you’ve done that, you can pay yourself, say, $5,000 a month. Assuming your billing remains the same or better, you should be able to pay your bills and accumulate more cash in the bank.

If at year-end you’ve built up a larger-than-necessary cushion, you can pay yourself a bonus.

Important Note: Taxes. Do not forget to set money aside for taxes when deciding how much to pay yourself. Be sure you have money to pay your taxes on time.

The key is that you don’t spend all of your money as soon as you get it and that you have a safety net for soft months.

In summary:

Get a separate business bank account
Save up a cushion of two months of average billing
Pay yourself an equal amount every month, leaving some cash in the account
Have money set aside for taxes
If you’ve built up excess cash, pay yourself a bonus
Keep an eye on your business. If overall billing decreases, your salary should follow suit

How Can You Improve Your Cash Flow?

Remember that cash flow is money that you have, not money you’ve billed. It has to be “in the bank” to count as cash flow.

So, the sooner you get “money in the bank”, the better.

The easiest ways to do that are to collect deposits and get clients on retainers.

Think of what would happen if you collected 50% deposits from all of your clients. You’d get 50% at the beginning and the rest 10 to 30 days after you’ve completed the job. Rather than wait to collect 100% in the future, you spread it out. That’s what you’re aiming for in your cash flow.

Or, with the right type of clients, you can work on a retainer arrangement. Typically, the retainer is due on the first of the month for that month’s work.

Retainers work well for predictable or repetitive work. You might be writing four blog posts a month. You could be a dev doing regular maintenance work or a product photographer with a steady stream of shots to take every month.

Many creatives work on retainers, making their cash flow much more predictable.

It’s worth looking at your clients to see whether it would benefit both parties to work on a retainer arrangement. Many clients like retainers because it makes their expenses predictable.

Some tips on talking to clients about money

Clear Terms & Conditions Also Improve Cash Flow

Even if you’re not collecting deposits or working on retainer arrangements, you can improve your cash flow by enforcing your terms and conditions.

Let’s say your payment terms are “payment in full in 10 days”.

When you’re talking to a prospective client, you should review all of your terms and conditions. That would include how you work, how many revisions are included in a project, how you expect to receive feedback, and most importantly, how you expect to get paid. Don’t be shy. You’re running a business. Your business, your rules.

Make sure they explicitly agree to these terms. You want clients you can count on for payment.

It’s much easier to set out the rules of engagement at the beginning than playing catch-up or endlessly chasing after money.