How to Survive Feast or Famine Cash Flow
One part of the freelancing puzzle I haven’t solved yet is keeping cash flow stable. Here’s a lifetime graph of my revenue, month, by month:
There’s a lot of peaks and valleys. Good clients, bad clients, late payments, upfront payments. Sales slumps. Family emergencies. It’s all there.
About a year after I became a freelancer, I started another exciting venture in my life: marriage. Once we got back from our honeymoon, we had to start dealing with one of the mundane parts of marriage: Money. Merging finances and budgeting for the future.
Budgeting is hard when you have a reliable salary. Planning on variable income seemed impossible. The first year I was married I brought home $0 – $10k+ per month. How could I decide how much I could dedicate towards groceries?
I was also riding the rollercoaster emotionally. I’d feel great on good months, and stressed on others. It was hard for my family and me.
There are ways to balance these peaks and valleys that I’ve implemented since then: Better billing practices, selling monthly retainers and launching products. These changes take time, and you don’t have to change your business to get a handle on your finances.
Smoothing Out The Edges
I needed to get a better handle on money. I decided to set up a system that would help me manage my dollars and set me up for future success. As I wrote about in my article on risk, standing on shaky financial ground means you are unable to pursue options that have more risk or didn’t pay off in the short-term.
This is that system.
It’s a bit jarring to make the switch, but if you do you can live a more balanced life and build a stronger foundation for your business.
1: Separate Business and Personal Bank Accounts
I’m a programmer; I’m pretty big on decoupling. Decouple means to take two things that shouldn’t be combined and separating them. This way bugs break one thing instead of not ten. The first step is to set up a business checking and savings account. You can set one up as an LLC, S-Corp, or sole proprietor. This way you’ve decoupled your business finances from your personal, which will help you decouple revenue from income.
The savings account is for your tax payments. I’m not an accountant, but I strongly recommend setting aside a percentage of every payment you receive so that you don’t get caught with a huge tax bill at the end of the year. The amount will depend on your revenue, expenses, and state, but it usually falls in the 15% – 35% range.
Talk to a professional accountant if you have tax questions. Accountants can easily have a 10x return on what you pay them.
Now, all of my revenue doesn’t go to me; it goes to my business.
2: Figure Out Your Monthly Nut
Your monthly nut is a fixed amount that you need to cover your expenses. You want to calculate your fixed costs and any fixed number for any debts or savings. Any annual costs should be divided by 12 and factored into each month.
If you aren’t sure, it’s better to guess high than low. If you underestimate on your power bill, it could be a financial stress. Too high, and you can buy an extra sandwich this month.
3. Figure Out Your Salary
Now it’s time to figure out how much to take from the business each month. Your monthly salary should be your expenses + enough to be comfortable. It’s a personal decision. You don’t have to be a miser, but lavish spending will defeat the whole point of the exercise. Leave yourself some fun money.
Once you’ve calculated, you’ll know the fixed amount that you will transfer from your business account to your personal account. That’s your salary, and it is unaffected by that month’s revenue.
You now have a payroll with one employee. As a business owner, you have a clear idea of how much money you need to make each month, and as a human you know what to expect.
4. Making The Switch
It can be hard to make the switch from living invoice-to-invoice over to a salary. You might not be able to make the switch just yet. It’s easiest when you are having a better month. If you can’t switch just yet, put whatever percentage you can afford towards your business checking account. Even if it is just 10%, it’ll help you start to make the switch.
When I first started, I paid myself every Friday. Doing payroll in shorter intervals can help you make the transition. Now I pay myself on the first of every month.
The psychological benefit is huge. I cash my paycheck, which I physically write and scan with an app because I’ll be damned if I’m paying $10/month for direct deposit. Once that hits the bank, I know I’m covered for the month and don’t have to worry.
5. Build Your Runway
As your business starts to better with its calmer, focused CEO at the helm, you may find you are building a stockpile. You now have a new and more fun problem:
What do I do with all this extra cash?
You have a few options. If it’s consistent, and you have other personal needs or goals, you could give yourself a raise or a bonus. The goal is long-term growth, but there is nothing wrong with rewarding yourself for good work from time-to-time.
The option I prefer to is to start building a runway. The runway is the number of months your business can keep going. Most of us work on a perilously short one.
I have a payroll target to hit. I need a certain amount of available funds after business expenses to make payroll on the first. When I first made the switch I had months, I didn’t make payroll until the 27th. But as I worked and saved, the gap got wider and wider.
Now, it’s Mid-September, and I’ve already made payroll for the year. I can sleep easy even if I don’t bring in another buck.
Longer runways lead to higher and further flights. Once you have a runway, you can take the time to learn new skills, target new markets, and build new products; and you can do it without fear.
So think about this, and let me know in the comments, If you had six months of runway, what would that mean for you and your business?