Freelancers, at least this freelancer, has a tendency to see business in waves. We’ll be busy for a time and then not so busy. It can sometimes create an unrealistic picture of how much money is flowing into the business and it creates occasional months where cash, or rather a lack of cash, is an issue.
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For the last few weeks, I’ve been sharing some thoughts about the business side of freelance design. I’ve talked about setting prices, understanding costs, and reducing costs. One last topic to cover in this discussion is cash flow. There are a handful of things we can do to manage the the flow of cash into and out of our businesses to smooth out the ups and downs.
- Improve how you budget your money
- Improve project scheduling
- Schedule payments more frequently
- Increase recurring revenue
- Include side projects and “passive income”
Let’s talk about each in a bit more detail.
Improve How You Budget Your Money
An obvious solution to the ups and downs of cash flow is simply to get better at budgeting your money. Be more disciplined when money is coming in so there’s more in your account when it isn’t coming in.
Be more accurate in recording your revenue and expenses, both business and personal. It helps to track both over a longer time frame. Don’t be deceived by a lot of money coming in over a short period of time. Understand what you spend on average each month and stick to your budget.
Have your money flow into a single business account and only withdraw what your monthly budget allows. Pay yourself a salary and leave the rest in the account to cover your future salary. Ideally you’ll build up a reserve in your business account so you know you can cover a few months of lean times.
Improve Project Scheduling
If the problem is being too busy one month and not busy enough the next, you might be able to fix the problem by scheduling projects better. Instead of taking on projects all at once be more realistic with your calendar and spread out projects over a longer time frame.
You collect a deposit to reserve a spot on your calendar and ideally you’ll be able to schedule enough in advance to be the right amount of busy.
It’s possible you’ll lose some clients you can’t help right away, but more often than not you won’t as long as you aren’t pushing their project off too far into the future. Leave a little wiggle room in your schedule for the unexpected and occasional projects that can’t wait. Building some flexibility into your calendar will allow you to be more flexible in the work you take on.
Schedule Payments More Frequently
I assume and hope you don’t wait to charge in full after the job is complete. It’s a quick way to go out of business. At the very least you should take a deposit before beginning work.
For years I’ve taken half up front and half on completion. To help with cash flow I’m spreading this out more. Instead of 2 payments I’m pushing for a 3rd one.
- Payment 1 — before work begins
- Payment 2 — after approval of design
- Payment 3 — on completion
There’s no reason why 3 payments can’t become 4 and then 5 and I think I’ll continue to increase the number of payments for most jobs. Andy Clark often mentions that he uses a weekly payment schedule.
Spreading out the payments naturally smooths cash flow, but it also means neither client nor freelancer is ever on the hook for much. The financial risk is reduced for both parties.
Another way to schedule payments is to complete a job and bill the client beyond the completion date. Instead of the client paying a few thousand dollars over the few months it takes to complete their site, I might have them pay a few hundred each month for a couple or more years until the project is paid in full.
I wouldn’t do this with new clients, but I’ve tried it with existing clients where there’s trust on both sides and it’s worked out well enough to try again.
You can usually increase the overall price for the job a little, because you’re waiting on the money. Clients benefit by not having too pay to much at once and you benefit by having money come in each month even if it means waiting for the project to be paid in full. Again trust is important if you do this.
Increase Recurring Income
Some clients will need work on their sites again and again. It might be as simple as maintaining and updating a CMS or the client may come to you multiple times throughout the year with projects. Some might email often with questions.
You can ask if these clients would like to work out some kind of retainer agreement with you. They pay you at the start of each month and you do whatever work they send in that month.
There’s a balance you have to find between how much you charge and how much work you have to do for that monthly payment. It’s something you have to work out with the client. Be clear about what work is and isn’t covered by the retainer and you should be ok.
I’ve had clients take advantage of this relationship expecting thousands of dollars of work each month for a couple hundred in payment. I even had to fire one client who consistently tried to take advantage of the relationship. Most of my clients don’t take advantage, though.
I tend to give clients a bit of a break when they agree to a retainer and pass on the savings of not having to estimate and negotiate each project with them. It’s worth a slightly lower fee to know I have money coming into the business each month.
You’ll likely need to periodically adjust fees. Keep track of how much time you spend working and revisit the agreement every so often to make sure it’s fair to both you and your client.
The work itself will still ebb and flow and this is one reason to keep some flexibility in your schedule. The money, however, will remain consistent from month to month. Build up enough recurring work and you have a business that provides for you regardless of what new work comes in each month.
Include Side projects and Passive Income
Your clients don’t have to be your only source of income. You can add other forms of revenue to your business that are more passive such as advertising. Running ads on your site may not be the most lucrative thing to do, but it can provide a small bit of cash each month for little work.
AdSense takes minutes to set up. You might join an ad network or look for affiliate products to promote. You will need an audience to make money with any form of advertising and that does require work, however if you’re already blogging for other reasons the additional work is minimal.
When I say minimal work, I’m talking about advertising or selling affiliate products as something you do on the side. Either can be done as a full time business, which will require full time work. However, if your site gets enough traffic, you can place a few ads and/or links on parts of the site and make some residual income without much effort.
Side projects are a little different in that they may or may not lead to passive income. In regards to business they’re projects you do for yourself during lean times with client projects. We often think of side projects as doing something just because you’re interested in doing them, but there’s no reason you can’t make some additional money from them too.
You can create books, themes, tools, whatever. Once complete you can offer them for sale and assuming they meet some need or want, people will buy them. Depending on what you create and sell it may not be as passive as you’d like, though what you sell may evolve into a thriving business on its own.
Instead of products you can offer additional services. For example hosting through a reseller account. It means you’re dealing with server issues, but in some cases you might be doing that anyway. You could offer domain services or anything related to your basic services to generate some kind of recurring fee.
Even a busy business can suffer cash flow problems. Most freelancers don’t receive consistent work. Projects tend to come in waves leading to ups and downs in revenue.
The way to smooth out the ebb and flow of cash is to spread out the money you earn in some way or to add different forms of revenue that come in on a more consistent basis.
Improve how you budget and schedule projects. Set up longer term payment schedules and offer recurring services to clients. Look for ways to bring in additional forms of revenue where it makes sense. Some spread out the work, some spread out the payments, and some bring in additional revenue.
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Very informative and practical ideas! Thanks Steven, really useful stuff as a freelancer.
Thanks Jonathan. I’m glad you enjoyed the post.