The Joys of Managing Cash Flow as a Freelancer

Managing cash flow as a freelancer can be a real challenge, especially when it's all automated and you aren't connected to your money.

I have enough money to cover all my bills this month. However, I let things get a little off and ended up with an overdraft in my primary checking account. Mainly because I was thinking more about straight-up: Here's how much I'm getting this month/here are my expenses. That's great that I have enough to balance out at the end of the month. What I don't have, though, is quite enough right now.

I forgot to take into account the timing of when I receive my money. It's more about cash flow at this point than it is actual cash.

Pay Attention to Cash Flow

When you run a home business, you must realize that money doesn't always arrive right when you want it to. Here are some of the things you have to keep in mind as you plan out your home business income for the month:

• Your income is irregular. You might not make the same amount each month.
• Sometimes, clients pay late.
• Receiving your funds can take a few business days if you accept PayPal.
• Your bank might only immediately credit the first $100 of a check to your account and hold the rest until another day.
• The order of your transactions may not matter. Some banks maximize overdraft fees by taking out all of the debits first and only adding the credits at the end.
• Your automatic debits are coming out no matter what.

My finances are mostly automated, and that makes a bit of a difference. It's all — retirement account contribution, transfer to the travel fund, rent payment, car loan obligation — coming out on the appropriate date, no matter what.

But, instead of paying attention to how that affected the overall picture, I kept moving along, business as usual. A slight adjustment to the timing of one of my transactions would have helped me avoid this entire situation. However, I wasn't paying that much attention to my cash flow. And it came back to bite me.

Are You Connected to Your Money?

Because so many of my transactions are automated, it's hard to feel connected to my money sometimes. However, taking the time to maintain a connection to my money is essential to avoiding that whole overdraft situation.

In the past, I've used a line of credit connected to a bank account to smooth my finances. Today, I often used rewards credit cards to cover my expenses and then pay them off. That way, I'm using other people's money for everyday stuff, and my bank account has most of what it needs. As long as the credit card gets paid off each month, I don't have to worry about interest.

My current issue occurred because an automatic payment to a credit card clashed with the timing of receiving my usual “paycheck” from the S Corp. I turned off my paychecks because things get weird in December and January. Client work drops. Some clients pay early while others don't. It's a mess. So, the regular paycheck didn't come, and the credit card was paid.

Luckily, I could fix the issue, but none of this would have happened if I had been connected to my money in the first place. Normally, I check-in. But things got busy. I was distracted.

How to Have a Money Check-In for Managing Cash Flow as a Freelancer

1. Choose one day a week to review your situation. Make it a day you can reasonably count on each week. Sometimes I miss a week, but I try not to miss two weeks in a row.
2. Check to see which clients have paid. Do you have a system for invoicing? Make sure your clients have paid. Make a note of which clients are behind.
3. Review your other accounts. What's already come out? Check the charges on your credit card and your bank transfers. Make sure everything's in order. Flag problematic or fraudulent charges.
4. List spending that isn't a priority. Notice items like subscriptions that you aren't using. Take a look at spending that doesn't align with your values. Make a plan to cancel those subscriptions and revamp your financial priorities to avoid other spending.
5. Look ahead to bills coming due. What's coming out in the future? Do you need to preserve money in your account for a rent or mortgage payment? When does the insurance payment get taken? Do you need to plan for grocery shopping in the coming week?
6. Match automatic transfers with income and expenses. Ensure your automatic transfers align properly with your upcoming bills and income. If you need to tweak some of your dates, see if you can. When I struggled with a two-week paycheck, I adjusted so I was paying myself once a week.
7. Tweak as needed. Managing cash flow as a freelancer is mostly about making adjustments as needed. Connect to your money and do this effectively.

Tips for Managing Cash Flow as a Freelancer

Better cash flow management leads to peace of mind. You're more likely to accomplish your goals and make the most of your situation. Here are some basic tips for managing cash flow as a freelancer:

• Know your number. Be aware of how much money you need each month to meet your basic needs. You might have a lower number if you have a partner that brings in money. Just know where you're at and how much you need to accomplish your goals.
• Set aside a sinking fund. Or emergency fund. Whatever you want to call it. Have an account that's readily accessible so you can put money into that account regularly. Put extra into that account when you have a month with earnings beyond your number. You can bank the entire excess or designate a percentage of the excess. Whatever works for you. I use a taxable investment account. When my monthly income doesn't reach my number, I sell some stocks and use that to cover costs.
• Plan for taxes. As a freelancer, you need to plan for taxes. I used to do this by automatically transferring money into my monthly tax sinking fund. Today, I do it by paying Gusto to manage my payroll. I get a paycheck from my business, and Gusto handles the state and local taxes and all the pesky FICA stuff.
• Know what you can cut if needed. Sometimes, your sinking fund isn't enough to smooth cash flow. This is especially true if you have multiple sparse months in a row. Deciding what to get rid of immediately can help you spring into action if required. I know exactly what I'll cancel if needed.
• Check-in regularly. You can't assume everything is fine. Maintain that connection with your money.

Bottom Line

A home business presents challenges to managing cash flow that you don't see when you're a salaried employee. The money isn't always there at the same time, month after month.

When you live on a variable income, it's vital that you pay attention not just to how much you expect but when it will actually be there. I should have built up a better cushion in my checking account and paid better attention to how the timing would work out. Cash flow is just as important as how much money you have.