Do you struggle with cash flow issues in your freelance writing business? Many freelancers feel like cash is always flowing out and rarely flowing in! If this describes your freelance business, then you may want to read my latest article on Medium: Budgeting Basics for Freelancers – The Cold Hard Truth About Cash Flow.
I have been a freelance writer, editor, and content marketing consultant for over 15 years. To celebrate my content marketing agency‘s 15th anniversary, I have put together a series of lessons learned and advice for freelancers. This is article 12 in the series. You can read the series in order or simply choose a starting point that interests you. The articles stand alone but you’ll definitely receive more benefits from reading all of them.
Now, on to cash flow…
Cash flow refers to the flow of money into and out of your business. Cash flows in when you receive payments: a royalty check, payment for an article published, payment for a client invoice. Cash flows out when you pay bills: your health insurance premiums, internet expenses, office supplies.
The Rollercoaster Cash Flow Effect
Freelancers often suffer from what I’ve dubbed the rollercoaster syndrome. Their income, when charted on a line graph, resembles the peaks and valleys of a theme park roller coaster. The peaks represent times when they receive a large payment or have a significant client rosters of well-paying customers (feast). The valleys represent times when work dries up or they are between clients or engagements (famine).
Nearly every freelancer, at some point in their career, faces the rollercoaster syndrome. The trick is to smooth out the peaks and valleys to have either a steady chart or a rising line on the graph. To do this, you need to build a business around core retainer clients (anchor clients), large recurring clients, and one-off projects, or a similar model. Indie authors may build a business around core income-producing products (a romance novel series, a mystery novel series), large single projects (a single romance novel, a single title) and passion projects or one-of projects (hosting a writer’s workshop, teaching a class, editing other author’s manuscripts). The idea is the same regardless of how it works out in your unique business.
What’s Your Net Profit?
Few freelancers consider their net profit. Most think only in terms of the gross profit, or the total amount of money billed or received in a particular time period.
However, that number is misleading. Net profit provides you with a better indication of your business’ health.
Net profit = gross profit – expenses
Simply take the gross profit number, subtract the total expenses for an equal time period, and the resulting figure is your net profit.
Cash Flow and Net Profits Are Not the Same
Think of cash flow and net profits like verbs. Cash flow is active, while net profits is passive. In other words, cash flows, like water in a river, while net profit is still, like a pond. Yes, net profit changes, but cash flow is often called the lifeblood of a business, because money must be constantly flowing into and out of a company to build health.
Cash flow often stagnates for several reasons:
- Lack of business – you can’t bill for what you’re not doing! If you aren’t getting enough new clients or repeat business, it’s time to focus on the basics of client attraction, retention, and loyalty – in other words, branding and marketing.
- Late billing – you aren’t billing your clients on time. Decide when you’ll bill clients and then follow through consistently on your billing practices. Do you require a percent downpayment on a large project and bill at milestones or installments? My own billing practice is to bill for work after it is complete and accepted by the client. Retainer clients are billed on the first of the month for the work from the preceding month (i.e., I bill on June 1 for services rendered for May 1- 31). It doesn’t matter whether you bill weekly, monthly, or quarterly, just be consistent and on time sending out invoices to clients.
- Late payment – are your clients paying you later and later each month? You must follow up with them. Start off gently. After all, things happen. I have one client whose CEO must sign off on all contractor invoices, but he travels frequently for business, and when he travels, payments can be late. Reminders to their accounting department help. Set up reminders in your calendar or however you manage your business billing to follow up on unpaid invoices.
For more tips on managing cash flow, and creating a thriving freelance practice, do check out my article series. I’m on article 12 of 15 and many freelancers have commented on how helpful the series has been. It’s not the usual stuff to help you set up and run your business, but insights into the odd nooks and crannies of the freelancing life that few think of when starting their business.