How to improve cash flow: Practical tips for freelancers
This article was written by our partner Penny, the innovative freelancer platform that pays your client invoices within 24 hours to help you manage cash flow.
“The three most dreaded words in the English Language are ‘negative cash flow’.”
– Sir David Tang.
While being self-employed undoubtedly has its benefits, inadequate cash flow can be a serious cause for stress for freelancers. A potentially inconsistent client base, lengthy payment terms and late paying clients are all factors that can contribute to cash flow issues.
For this reason, putting in place a solid cash flow strategy is a really important part of running a successful freelance business.
Let’s take a look:
7 practical ways to improve your freelance cash flow
1. Prepare cash flow forecasts and stick to a budget
As a freelancer, the amount of work you receive can vary, which makes predicting income and expenditure tricky. Because of this, it’s important to create cash flow forecasts.
A cash flow forecast will detail when you can expect money to be sent and/or received on a more frequent basis. This differs from a budget, which shows broader income and expenditure figures over the duration of a given project.
2. Set aside a savings cushion
Though not always possible, it’s important to try and put a percentage of the money you’re earning aside as savings. Having a financial buffer in the bank can help to tide you through quieter months, while also ensuring you have funds to cover emergencies and unexpected costs.
3. Send invoices in advance
When it comes to receiving timely payments, the earlier you send out invoices, the better. Some clients will still hold off paying to the last minute, but others will pay up promptly, meaning the earlier you get your invoice out, the quicker you get paid. This can help to reduce cash flow gaps created by large payment windows.
4. Establish clear payment terms
As well as sending out your invoices early, you should establish clear payment terms from the onset, to help avoid problems with clients further down the line. Your payment terms should set out clear payment dates, and you might want to consider including penalties for late payment, such as interest charges.
5. Raise finance against your invoices
If you want to alleviate the wait time between receiving payments for your products or services, invoice financing could be a good option for you. This flexible funding solution is a great way for freelancers to increase their cash flow, get paid quickly and save time and energy chasing payments.
Penny is an innovative spot invoice finance service that helps freelancers and small businesses maintain a positive cash flow. This unique solution helps to speed up invoice payment terms by reducing the time it takes for money to reach your account. Check it out here.
After buying your customer’s invoice for a small fee, Penny takes over responsibility for collecting payment and pays you the amount you are owed in just 24 hours.
6. Claim self-employed tax deductible expenses
Claiming expenses is another way you can save money as a sole trader. When filing your annual Self Assessment tax return, you can deduct ‘allowable expenses’ for costs that directly relate to your business.
This doesn’t include money that has been taken from your freelance business to pay for personal purchases. But, you are able to claim:
- Office costs
- Advertising and marketing
- Costs related to your business premises
- Travel related costs
- Clothing expenses
- Stock or raw materials
7. Reconsider your freelance rates and pricing
If you’re constantly overloaded with work and still regularly find yourself facing cash flow problems, it might be time to reconsider your pricing structure.
Those new to freelancing often find it difficult to decide their rates, but as time goes on and you begin to feel more confident in your ability to retain clients and produce quality work, you shouldn’t be afraid to raise your prices.
Cash flow management in 2021
The economic uncertainties caused by Covid-19 have made navigating cash flow management all the more difficult. As a freelancer, it’s now more important than ever to take steps to boost your business’s liquidity. Unlocking money from unpaid invoices is one easy way to do this, which is where Penny can help.