Freelance Finances: The Holy Trinity

by Lee Distad

Cartoonist Don Martin once wrote that the root source of the term “Freelance” was both “Lance,” a medieval knight’s weapon, and the French word “Froid” for cold.

As in, if you didn’t succeed selling your services and making some money, you’re going to freeze to death outside in the cold.

Those of us who’ve struck out on our own to become freelance consultants, often after years of being employees, love the choice we’ve made and wouldn’t have it any other way. But it’s not always easy.

When anyone asks me about going solo, my answer is “Do it!” Following your heart and passion is what will make your mark on the world. However, while spontaneity is great, you do need to prepare.

Being self-employed requires discipline and management of your finances that you might have gotten away with neglecting when you earned a steady paycheck.

For the self-employed, sound finances require you to keep control of three things.

Cash Flow

Now that you’re freelance, you eat what you kill. You’re the one responsible for bringing in business, managing your receivables and making sure that your clients pay in a timely manner.

When it comes to sales, finding business is job one. Saving and minimizing expenses are important, but earning more income is even more so. No one every made money by saving money; you make money by making money.

If getting business is job one, getting paid is job two. On the receivables side, whether you use accounting software or even a simple Excel spreadsheet, you need to know who you have billed, when you billed them, whether they’re overdue, and when they paid up.

Let’s be honest: even clients who really like you will only pay their bill when you ask them. Central to having a consistent cash flow is to have well-managed receivables and keep your clients’ payment schedules on track.

Savings

A perfectly non-volatile cash flow from month to month would be great, but in the world of the freelancer, it’s not always going to happen.

Whether project delays have held back an installment payment or “the check’s in the mail,” there will be times when you don’t get paid when you thought you would. When a graph of your cash flow starts to look like a sine wave, you need to be prepared.

There have been times where I’ve had loose cash in the bank that more than buffers my monthly budget, and there have been times where I’ve scrabbled from check-to-check.

Which do you think is more conducive to a good night’s sleep?

Having good savings is a pre-requisite to being able to live your dream job and work for yourself. If you don’t have the cash reserves to be able to hang in when things are tight, you might be forced to put your dreams on hold, or worse.

Credit

Using lines of credit ought to be a last resort for individuals and small businesses, but the fact remains that access to credit can be a necessity. It has its place in your financial plans, but you need to use it wisely.

Provided that tapping your cash savings isn’t an option, drawing on your line of credit to pay the bills isn’t a bad thing. Just don’t borrow so far in advance of your means that your revolving credit morphs into a permanent balance.

For starters, you’ll be paying monthly interest on it, and I know you’d rather spend that money on something else. Even worse, a long-term balance erodes your resources in the event of a serious personal crisis: financial, medical, otherwise.

These aspects of your personal finances are like the three legs of a stool: together they give you stability. But take one away, and your balance is just a little more precarious.

Manage all three successfully, and things will go more smoothly in your chosen profession as a freelancer.

Lee Distad consults with CE integration firms on design, installation and project management processes and Best Practices, and offers provides professional copy writing services for websites, brochures, and marketing initiatives. His freelance work covers topics from CE to global business to finance in both print and online.

About the author: Lee Distad consults with CE integration firms on design, installation and project management processes and Best Practices, and offers provides professional copy writing services for websites, brochures, and marketing initiatives. Visit him at www.leedistad.com.

{ 1 comment… read it below or add one }

Veronica @ Pelican on Money September 4, 2012 at 12:53 pm

You’re right on the money about having cash reserves to survive as a freelancer. During the time that I was out on my own, saving money and living frugally was priority #1. The highs and the lows in business were just too wild to keep a sane mind without having some sort of cash cushion to lean on. Lee, great tips for anyone thinking about sticking it out on their own!

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