Understanding the irregular income stream
Whilst self-employment has heaps of benefits from being your own boss to working on a variety of projects to working with a range of clients, there are also challenges freelancers face. Freelancers not only have to be able to do the work (and do it well) for their clients but they also have to factor in:
- An inconsistent client base: meaning they’re spending time sourcing new clients and new work.
- Difficult clients: meaning they’re constantly chasing clients for late payments.
- Inconsistent cash flow: making it difficult to manage your cash flow to ensure you have enough money to pay for all your expenses.
All of this can impact financial stability and stress levels.
“In addition to the financial impact, many small business owners cite anxiety caused by cash flow issues. Frequently, small business owners are concerned about whether they are personally able to draw a wage in a particular month or whether they can pay their staff.”
- Department for Business & Trade
We can’t help you with your client base or dealing with difficult clients... but we can provide some help when it comes to cash flow.
What is Cash Flow?
Cash flow is the movement of cash in and out of a business. Freelancers/sole traders/contractors need to do everything they can to optimise it. This generally involves a combination of managing spending and making sure that all customers and clients pay on time to ensure you have more money coming in than you do going out.
If you’ve ever struggled to cover expenses one month, it might be time to take your cash flow management more seriously.
We’ve put together a list of the top 6 steps for you to take to ensure financial stability.
Overcoming the Cash Flow challenge as a Freelancer
Step 1: create a detailed budget
Knowing Your Numbers
Budgeting is even more critical for freelancers than for other professionals. Your cash reserves are smaller than large businesses and you’re solely responsible for covering any expenses. Having the foresight of what money is likely to come in and go out is a core element of cash flow management.
How to create and maintain a budget?
Sometimes it’s the simplest things that are the best. Use an Excel spreadsheet (either create one from scratch or search the internet for free templates) and fill it in with your past income and expenses. You can even categorise these if easier.
Using that information, you can make educated predictions for your future income and expenses.
Your budget should tell you how much money you’re spending each month so you can do the following:
- See where you might need to cut expenses
- Accurately predict how many projects or new clients you need to take to cover these expenses
Once this is all done, make sure you’re consistently tracking your cash flow so you’re always on top of how much money you currently have available, how much you’re likely to bring in over the next month, and what upcoming costs you need to cover.
“Improved cash flow will allow businesses to spend and invest with greater certainty. It will reduce the time spent by businesses chasing payments, freeing up more time for other activities that will help them to grow.”
- Department for Business & Trade, 2023
Step 2: build an emergency fund
Preparing for the Unpredictable
You’ve got your budgeting spreadsheet and you can now forecast how much money is going out of your business vs how much is likely to go in. Great!
Life, however, is never that simple. Clients and work can come and go and this is never truer for freelancers and contractors. In short, your income will fluctuate and it’s important you have an emergency fund to ensure you have enough cash to pay for any necessary bills/subscriptions etc.
What is an Emergency Fund?
Put simply, an emergency fund is money that you have set aside for ‘a rainy day’ (aka, when you have less money coming in than you do going out). This money should be kept separate from other accounts (i.e. your personal savings) and should only be used for emergency situations.
How to start and grow an Emergency Fund
Using your budgeting spreadsheet, work out how much you need to cover essential expenses (Netflix doesn’t count!) and tally up the amount. Best practice is to have at least two months of bills (or necessary expenses) saved in your emergency fund.
There are various methods in achieving this and each depends on your current financial situation. One popular method is to put 45% of every paycheck into your savings, which can be broken down into:
- 30% for taxes
- 5% for reinvesting into your business
- 10% for your emergency savings fund
The rest can be used for living expenses or reinvesting in your business.
Adding ‘only’ 10% per paycheck into your emergency fund may take a while so it’s up to you how you’d like to start and grow your fund. Our recommendation is to ensure that once it’s up and running, to get into the habit of automatically adding a percentage of your paycheck into this fund for those unexpected ‘dry’ months.
Step 3: invoice promptly and professionally
Timely Invoicing for Steady Cash Flow
When it comes to getting paid on time, the sooner you send your invoices, the better.
All clients are different. Some will wait until the last minute to pay whilst others will pay the invoice immediately, meaning the sooner you can get your invoice sent, the faster you’ll get paid. The result? Reduced cash flow gaps.
Another tip? Make sure your invoices look professional and have all the information needed for the invoice to be approved and paid. It’s generally best practice to include a clear description of the goods or services you provided so it’s obvious what the invoice is for. If you have a logo or any kind of identifier for you/your small business, add this in too!
The best way to manage your cash flow and invoices is to have a strong invoicing and payment process in place. To keep your business afloat, you need to ensure that you charge your clients accurately and keep track of who has/hasn’t paid (on top of all your other work). We’d recommend using an invoicing platform to keep on top of this.
Step 4: manage your payments efficiently
Staying on Top of Your Payments
The importance of tracking unpaid invoices
Unpaid invoices will disrupt your cash flow, making it harder to pay for your expenses and budget for future months. This is why it’s super important you keep track of what you’re owed.
Regular tracking will also help you avoid any potential delays in payments by identifying and addressing these issues early and reducing the risk of even more prolonged and overdue payments.
Staying on top of this also shows to your customers and clients that you and your business are well-organised which in turn can prompt an earlier payment and build trust. It will also help quickly resolve any issues before they might escalate into disputes (no one wants to threaten legal action against their client!)
How to follow up with clients effectively without damaging relationships
Late payments are always an awkward conversation to have and don’t wrong, can damage the relationship with your client. There are however some things you can do to prevent this:
- Be Professional and Polite: This should be a given, but when your stress levels are running high from a lack of cash flow, tensions and tempers can rise. Try to approach each situation with a calm, polite and professional tone. There could have been a genuine mistake or reasons you’re not aware of as to why the client hasn’t paid yet so try to express your understanding... but also make sure you stand strong about the payment terms. This is business and if you’ve provided a service, you should be paid for these.
- Get the Timing Right: Make sure you send a (friendly) reminder as soon as the invoice is late. If the payment still hasn’t been made you can follow up with a more direct (yet polite) message.
- Offer Flexibility: See if you could offer payment plans, extensions or even partial payments to clients who are having trouble paying (times are tough for everyone, including businesses!). This will show a great deal of empathy from you and a clear eagerness to work with them, which in turn can further strengthen your relationship. *Make sure you have the funds to allow this degree of flexibility though!
- Use Automated Reminders: Platforms and tools like Payment Bear’s automated reminders can take the load off you while making sure clients are being reminded of their due payments in a non-invasive way.
- Document All Communication: Make sure to keep records of all communication between yourself and your client around your unpaid invoices. This will make sure you’re protected if the situation gets worse. It also helps you keep track of what has been said for you to refer to in future.
The easiest way to do all of this is through an invoicing platform. We may be biased, but we think Payment Bear is the best 😉 with tools such as:
- Automated Reminders: Set up automated reminders through Payment Bear so your clients get a friendly nudge when an invoice is due, leaving you to focus on what you do best – your work.
- Custom Branding: Create professional-looking invoices by adding your logo and branding through Payment Bear to make sure you’re promoting yourself and your business in the best way possible.
- Invoice Dashboard & Generator: Time is Money. Freelancers can often not track how much time they’re spending on the admin side of their work which can massively build up. Payment Bear’s invoice generator and dashboard lets you create invoices rapidly and manage them all in one place. Essentially, it’s all your invoicing and invoices but made faster and simpler.
- Late Fees & Discounts: Want to encourage your clients to pay quickly and help with cash-flow? Payment Bear can automatically apply a late fee if your invoice isn’t paid on time. Alternatively, you can offer a discount to clients who pay early... a win for everyone!
- Customer Manager & Dashboard: Create, view and manage your customers and payments in one place, making it even easier to see who has or hasn’t paid (so nothing can slip through the net!)
- Open Banking Payments: Let your clients pay securely and instantly with Open Banking. It’s quick, easy, and (unlike other platforms) free - helping you get paid faster, every time.
Step 5: implement a retainer system
Securing Regular Income
Project or short term-based work is an obvious way of working with clients. They have a brief and you fulfil the brief. Job done! But also... job over.
Working with clients on a retainer instead of a project basis provides freelancers with a much more predictable income stream, allowing freelancers to plan their resources and cash-flow much more effectively. For clients, the benefit is also predictability – instead of pricing and calculating how much each project & piece of work costs, they know they have a certain amount to pay each month and a certain amount of work to coincide with this.
But how do you get new clients onto a retainer?
The most obvious point is to make sure that the potential new client is aware of your retainer services. This can be done through your initial ‘sales’ calls and/or any calls where you’re pitching your services to them. You can still offer a project fee if you like, but stress the value of the retainer for the client (they’ll get more bang for their buck, you’ve found other areas that need improving and would be willing to continue to be ‘on hand’ for them etc.)
Make sure your proposal to the new client leans more on the retainer, focusing on the client’s goals and challenges as a priority and highlight specific milestones to hit throughout the retainer (i.e. by the end of month 1 we’ll aim to complete X)
Retainers can seem quite daunting to a new client, especially if they haven’t worked with you before, so try offering a trial period before fully committing to a specific time period.
*Note that not every single client will want or need a retainer, so being attuned to where a retainer would work is key to ensuring you don’t scare off any potential clients.
Takeaway
Whilst there are heaps of benefits to freelancing, there are also many difficulties that come with the job. An inconsistent client base, difficult clients and a varying workload all contribute to an unpredictable income, leading to financial stress and uncertainty.
Improving and managing cash flow is fundamental to freelancers' financial stability. It allows freelancers to forecast and cover expenses and avoid debt.
By creating a detailed budget, building an emergency fund, sending invoices promptly and professionally, managing payments efficiently and – where possible – implementing a retainer system, freelancers can get a better grip on their cash flow and stabilise their income stream.
Tools like Payment Bear’s can massively simplify these processes. Check out which ones align with your business needs and see if you can reduce the time spent on financial admin so you can focus on what you do best... your work.
