Freelancers must manage their cash flow just like small business owners. Even solopreneurs incur expenses. Thus, they must manage their costs and optimize revenue.
Many professionals believe that adding more clients will increase revenue, and they’re right. However, independent contractors must assess the increased cost of operations when adding clients.
In most cases, the increased cost translates into hours. Then, entrepreneurs must assess how much they’ll earn per hour and whether or not they can still deliver high-quality work.
Most small businesses that fail within their first two years have cash flow issues. It’s tempting to finance business ventures with debt. However, the strategy puts independent contractors in compromised financial positions.
We look at seven cash flow tips for freelancers.
1. Understand Expenses
An estimated 70.4 million individuals complete some form of freelance work in 2022 and makeup 36% of the workforce. Thus, more individuals have found that it’s possible to enter entrepreneurship.
In 2021, over half of freelancers identified as solopreneurs, such as writers, website designers, video editors, and virtual assistants. Nonetheless, solopreneurs incur expenses.
Typical expenses are:
- Internet access
Then, additional expenses vary by industry. For example, rideshare drivers must maintain their vehicles, purchase appropriate insurance policies, and pay for gas. A UPS independent contractor might need to purchase their uniform and GPS technology.
Business consultants will invest in office space, marketing, and travel.
Therefore, gain an understanding of freelancing expenses.
2. Outline Fixed and Variable Expenses
Next, outline fixed and variable expenses. Fixed expenses remain the same monthly. Variable expenses change with output.
For example, obtaining more clients increases the need for electricity, gas, and data. Therefore, revenue increases, and so do variable costs.
Freelancers must keep their sales pipeline flowing. Therefore, balance growth with costs. Sometimes it’s best to grow steadily instead of quickly.
3. Separate Business and Personal Funds
Entrepreneurs who decide to incorporate their business and pick an LLC as the company’s structure must separate business and personal funds. Otherwise, commingling funds pierces the corporate veil and opens entrepreneurs to personal liability.
All entrepreneurs benefit from making the separation of business and personal funds a habit. Then, it’s easier to judge business cash flow and make adjustments as necessary.
In the beginning, independent contractors will invest personal funds into their venture. Ideally, they’ll only dip into business funds over time.
4. Adopt Software
Software has become a great way to manage business cash flow. Moreover, accounting software makes banking, filing taxes, and billing clients more efficient.
After some data entry, entrepreneurs can compile reports that help them spot trends and areas that need improvement.
Customer relationship management software helps solopreneurs close more deals by staying on top of the ones with the most potential.
5. Establish an Efficient Billing System
Freelancers collect payments from clients. Therefore, it’s essential to establish an efficient billing system since it impacts cash flow.
Before starting any project, ensure that all parties understand the payment terms. Then, continue working with clients who respect them.
Some freelancers can use freelancing platforms if billing and collecting payments become too challenging – the platforms act as intermediaries that bill, collect, and process payments.
Another option is to freelance through companies that bill clients for freelancers, such as Uber, Uber Eats, and Lyft.
6. Maintain the Sales Pipeline
Entrepreneurs will experience seasonality, and it impacts cash flow. Thus, independent contractors must prepare for it. Build a financial cushion before business slows down. Then, work to fill the gaps before the seasonality arrives.
Another option is to capitalize on demand and vacation when business slows down. For example, accountants must benefit from keeping up with demand during tax season.
They can offer other services or take a break when tax demand slows down.
7. Balance Cash and Debt
Financial professionals see debt differently in 2022. However, overleveraging debt has caused problems for corporations and solopreneurs.
Although it’s tempting to finance business operations with debt, focus on remaining liquid. Since the American economy has become more volatile, debt continues to become expensive.
Instead of debt, work within your incoming revenue.
Many individuals thrive as full-time freelancers, earning six figures annually. Even the most successful entrepreneurs must mind their cash flow. By understanding and managing expenses, less need for debt exists. Software allows freelancers to optimize revenue and maintain the sales pipeline, especially when business slows down.