Cash flow management is essential to your success if you work as a freelancer or solopreneur. Positive cash flow means that your business is generating enough income to cover your operating expenses and then some. Conversely, negative cash flow means that your business may be headed for trouble.
It’s important to understand the basics of cash flow management if you want to succeed as a freelancer or solopreneur.
Create A Budget That Includes Income And Expenses
Budgeting is an important part of running any business, and freelancing is no exception. Make sure that when you create your own budget, you include your income and expenses.
Creating a budget forecast is a great place to start, and it should include:
- Future income from clients/customers and other sources
- VAT amounts (if applicable)
- Operational expenses
- Taxes and other business-related expenses
If you have an estimate of how much money your business will generate over the coming weeks and months, you can set limits on your expenses and take steps now to ensure you’re generating enough income to stay afloat in the future.
Assign Specific Income Goals To Each Month
Once you have a better understanding of your monthly outgoings, you can help ensure that your cash flow remains positive by setting income goals.
Every month, set a realistic income goal. Hitting that goal will give you peace of mind that your cash flow is positive so that you can start building up your cash reserves or investing in your business.
To ensure you’re hitting your goals, make sure that you’re:
- Sending invoices in a timely manner
- Setting clear payment terms that clients understand
- Marketing and networking to attract more clients or customers
Establish Rules For Spending And Saving Money
One key rule of cash flow management is to avoid spending more money than you have. If your outgoings exceed your income, your business will quickly find itself struggling to stay afloat.
To help prevent this situation, make sure that you’re setting rules for spending and saving money.
To set rules for spending, consider your breakeven point. Setting your spending limit below this point will ensure you have cash to save. Now, set a goal for your savings, and adjust your spending limit so that you can reach this goal.
To limit your expenses and adhere to your spending rules:
- Make a list of every expense.
- Go through each expense carefully and eliminate those that aren’t necessary.
- Consider negotiating with vendors and suppliers to secure more favorable prices.
Following your spending and savings rules will help you maintain a healthy cash flow and stay in business.
Set Up An Emergency Fund For Unexpected Bills Or Expenses
Freelance cash flow ebbs and flows. Most freelancers and solopreneurs face slow periods throughout the year.
Setting up an emergency fund by building up your cash reserves will help ensure that you can stay afloat during these slower periods.
How much should you save? As a general rule of thumb, you should aim for a six-month emergency fund.
Estimate your expenses (business and personal) for the next six months and aim to have this much in your cash reserves at all times.
To build your emergency fund, you will need to limit your expenses and/or increase your income until your fund is full.
Track Your Cash Flow Weekly, Monthly, Or Quarterly
Proper cash flow management means keeping track of your cash flow on a weekly, monthly or quarterly basis.
Along with cash flow statements, make sure that you’re creating forecasts to get an idea of what your future cash flow could look like. One advantage of being a freelancer or solopreneur is that your monthly expenses are often fixed. This makes it easier to estimate your expenses and generate accurate forecasts.
Utilize Online Tools And Apps To Simplify Budgeting And Tracking Your Finances
Creating budgets and cash flow forecasts manually can be a time-consuming and tedious process. You’re more likely to make mistakes or overlook an expense if you’re doing these processes by hand.
To save yourself valuable time and reduce the risk of errors, consider using online tools and apps that simplify cash flow management and budgeting.
Accounting software is a great place to start, and these platforms often integrate with cash flow apps to streamline cash flow management. For example, a xero cashflow app will allow you to use your Xero accounting data to keep track of your cash flow, create forecasts and more. The process is automated and seamless, so you save time.
In Conclusion
Freelance cash flow may change throughout the year, but with the right strategies, you can ensure that you have enough cash reserves to stay afloat during slow periods. The key is to understand how much money you need to maintain operations and how much income you typically generate. Use the tips above to maintain healthy cash flow and continue growing your micro-enterprise.