Freelancers are slowly taking over the world. This not only is my belief, but is also what statistics in most developed countries show (as you can appreciate on this article by the HBR). Being a freelancer requires courage and self-confidence, apart from being a good professional and having good commercial skills to ensure your practice can grow. But once these skills are achieved, a major issue kicks in, and I’d like to red flag it: Cash Flow and Financial planning.
How can financial planning affect my practice? you might ask if you are an independent pro. But the truth is that it can become a matter of survival if you ignore it.
Let’s imagine that you are an IT developer. You just sold a project that will require one month of hard work. After that month, you’ll send your invoice and a few days after, you’ll receive payment. You only need to take care of your expenses for a couple of months till cash arrives. Nice and easy!
But unfortunately, it doesn’t always work that way. There are all sorts of variables that can affect when you will get your money. Let’s group them as the endogenous and the exogenous variables. The endogenous are directly related with the work you are doing, its scope, and everything mostly related to you. You can actively work on these from your side and mainly depend on your experience and skills. An example of these would be how fast you program and solve the different operational issues of the work. Every freelancer controls these issues and many are focused mostly on them.
But we are interested in the exogenous variables, the ones related to your client, his context, business practices, organizational culture, beaurocracy, etc, which are mostly out of your control. What can you do to reduce their impact?
There are many situations that can impact on the life cycle of the project as a whole, and in the payment process in particular.
First possible delay can come if development takes longer than expected (endogenous). It may happen that your client doesn’t keep to his side of the schedule, changes the scope or takes longer than expected to sign it off (exogenous). Then you send the invoice, patiently wait for the 30 day payment term (endogenous) to expire before requesting payment. Your initial payment date is already exceeded by over 60 days!
Yet, your client might have “not received it” (exogenous), or if they have, they’ll probably tell you something like “your payment is undergoing our internal approval process” (exogenous). After that, you may need to follow up a few times to finally receive the check which you’ll be able to cash in at a different date which you thought you would (exogenous). Delays, delays, delays…
If you are starting with your freelance career, these might have a big impact in your finances, thus in your stress level, thus in yourself. If you had foreseen payment a month and a half after agreeing to start the project, you now find yourself lagging behind the collection process twice longer or more and paying your bills can become a challenge. So have in mind the planning issue.
Here are some suggestions to avoid being caught in the wave:
- Use cash advances: You can ask for a payment in advance for a portion of the project. This not only will give some air in case you need to incur in project expenses, but shows goodwill from your client.
- Establish the contracting terms: You can present your client with a letter of agreement, which is a basis for common understanding and negotiation. You can clearly state the scope of the project, an invoicing schedule and payment conditions in it. In case of changes and variations in time, you can always refer to it later.
- Make clear invoices: You should include payment information in your invoice such as invoice due dates, payment terms, wire transfer instructions, etc. If there is a purchase order number identifying your project, you should include it as well (the collections guy at your client’s company will thank you for that).
- Bill by milestones: other than billing at the end of the project. You can complement this with the first suggestion (cash advance). This way you can expect smaller, recurring payments which should be easier for your client to pay.
- Know who to call: Get to know the collections guy’s name, email and phone number if you recurrently work for that client. Strive to maintain contact with him. Start worrying if he doesn’t answer. You can also include this information in the letter of agreement.
- Confirm: Make sure to have confirmation that your client received your invoice a couple of days after sending it.
- Be prepared: Think of a contingency plan if the expected payment dates start to drift away. I would advise that you try to keep a financial cushion if possible.
- Keep an eye on your expenses: You can decide to delay some of them (if possible) in case you need to prioritize other payments.
- Ooooooommmmmm: Know your clients and be ready to chase payments (specially those related to late paying clients). Have in mind that it’s a crucial part of surviving as a freelancer.
- Accept payment options to your client’s convenience: Make it easy for your client to pay, although there may be more admin work needed from you.
But the best suggestion I can think of is to know where you are standing from a financial point of view and never lose sight of this. I feel that being aware of what reality looks like and being prepared will always allow you to act in the precise moment. Being on top of this is key to survival. Denying it is passively waiting for the wave to come down on you without even having the chance to get a board that can help you surf it!