How to Manage Cash Flow Gaps
During my first full year of freelancing, I lost three of my main clients within a week. In turn, my monthly earnings sank from $6,000 to about $2,000. As I was earning a mere fraction of what I needed to get by, I panicked. I wasn’t earning enough to cover all my essentials, such as my rent, groceries, and gas for my car.
When you’re self-employed, there’s a litany of things that can throw a wrench in your plans—and of them all, I’d have to say that inconsistent income tops the list. I mean, how can you set—and stick to—a spending plan when you don’t know how much you’ll have to spend? Or how could you know how much to tuck away for retirement or put toward debt when your income fluctuates wildly?
But lulls are inevitable. No matter how hard you try, there’s always a chance that you won’t always get the work you need. When you hit a lean period, here are some relatively simple ways you can stay on top of your expenses.
Get one month ahead
Probably the single strategy that has helped my cashflow the most, as a freelancer, is staying a month ahead with my basic living expenses. For example, at the end of March, I try to have enough in my business bank account to cover bills for April.
Saving a whole month of expenses is a challenging task—especially when you’re just trying to stay afloat. The good news? You only have to do this once.
I started getting one month ahead back when I had a day job. Since I had a steady income, I was able to save regularly until I had enough to cover a month of barebones expenses. Once that was accomplished, I set most of my bills on auto-pay. If you don’t have a steady paycheck, you can still get a month ahead by setting money aside during your higher-income-earning months.
When I hit my goal of getting a month ahead, it was quite the game-changer: I didn’t need to stress about when money will be in my bank, or whether I had enough to cover an upcoming bill.
Save in chunks
Along the same lines, save when you can. Even after you get one month ahead, try to squirrel away a bit of money when you’re earning more than the average in a given month, or are gifted some cash for your birthday. You can put this money toward an emergency fund, or save for other long-term goals.
A note on retirement-savings when you’re self-employed: these savings are important, but putting money into a retirement account can be anxiety-inducing. Once you move money into a retirement account, it can be hard or costly to access … which is difficult if you end up needing it sooner than later. One option to consider is putting your savings into a separate savings account first, and then moving it into a retirement fund at the end of the year.
Ask your clients to pay you more quickly
Another thing that can help with gaps in cash flow is seeing if your clients can pay sooner than later. While the standard turnaround to receive payment after sending an invoice is 30 days, ask your clients if they might be able to pay you more promptly.
Sure, some accounting departments have a strict protocol and payment schedule—they might be dealing with a large volume of transactions from different departments—but it doesn’t hurt to ask. Depending on the client, they might be willing (and happy!) to pay you more quickly.
Jot down payment methods
You’ll also want to factor in when the money drops into your bank account. In my experience, some clients pay on the same day each month while others are less predictable.
Also, no matter which method your clients use to pay—check, PayPal, credit card, or ACH—you’ll want to note it down. This makes a big difference in timing, so taking it into account can help you stay on top of your bills.
You’ll typically receive payments quicker through PayPal and credit card, whereas checks in the mail can be somewhat unpredictable. And if it’s an option, choose to receive money from clients as an ACH payment, or an automated money transfer. Since these are more predictable and often faster than checks, they’re a godsend for those of us who have to deal with variable income.
Sync your bills up with payments from retainer clients
Another favorite tactic of mine is to put income from retainer clients toward specific bills. For instance, during my first few years of freelancing, one of my retainer clients paid me roughly $2,000 a month, split into regular payments on the 15th and 30th. As this was steady income I could count on, I put that money toward rent and a few of my main bills.
Let’s say you have a few clients that offer you either larger payments or more consistent work. You could jot down your monthly living expenses, the amount and when they’re due. Next, “assign” income you get from certain clients to bills. If it’s steady work you can count on, you might be able to set some of these bills on autopay.
When you’re self-employed, you’re in the driver’s seat
While managing your money on a variable income is pretty challenging, it’s certainly doable. It doesn’t even have to be as dramatic as stopping all spending, or hustling nonstop until you get an influx of cash.
Just like yoga or pilates, where minor adjustments make a big difference, small shifts can help you keep your financial situation strong and stable. These strategies have helped me get through my rocky first year as a full-time freelancer. I continue to use them, today, to have greater stability and flexibility in my day-to-day work.
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