Freelancing is a great choice if you want more freedom and control of your work and time, but admittedly not the greatest choice if you need financial stability at all times. That’s why we are such proponents of maintaining a balanced budget and getting wise to the basics of Accounting 101.
One of the best ways to sleep better at night is to have a solid projection of how much money you’ll have coming in and going out over the next 12 months. In order to do this, we’re going to demystify a boring/scary term for you: cash flow forecasting. It’s dry, dull, but potentially one of the best things you can do to gain peace-of-mind as a freelancer.
What is it?
Cash flow forecasting is something that almost every business does, from enterprise-level to startups. In essence, it’s a data-driven prediction of money coming in and going out, so you’ll have a good idea of how much money you’ll have over the next year. In short, it’s a way to know you won’t suddenly run out of cash.
While it’s easy for businesses with CFOs and accountants on payroll to forecast cash flow, we find that most freelancers don’t have a formalized process of performing this important task. Sure, they have a general sense of “money in, money out” but many shy away from doing the actual math, keeping track of their invoices, and refining their calculations as work changes. But not only can it provide more financial stability, it can also show you the path to grow your freelancing business (more on this later).
How to get started
Let’s start with just one upcoming month. What income assumptions can we make for next 30 days? Let’s say:
- You have $10k of operating cash (money earmarked strictly for business) that will be the baseline.
- Most of your clients will pay the full invoice within 30 days and you’ve invoiced $4500. (Say 90% of your invoices will come in)
- There is a chance a new client will come onboard. If so, you would invoice $1000. (Say 50% chance)
And the assumptions for your expenses for the next 30 days:
- You’ll “pay yourself” X amount of dollars as your base salary.
- You have business credit card payments.
- You have business travel expenses.
- You have overhead (rent, internet, etc).
- You have estimated taxes. (Say 20% of income)
Toss all this into Google Sheets and bake at 425 degrees. Then, your basic cash flow forecast for next month will look something like this:
There you go! October is forecast! Now you immediately see at least one thing: you expect October to decrease your Operating Cash amount (from $10,000 to $9,640). Now, if everything goes better than expected (100% of what’s invoiced comes in, the new client definitely signs on), then you’d see a surplus. But by having those key assumptions, you are factoring risk into your forecast. In case things don’t go as planned, this projection is what you have a high probably of dealing with in October.
Since you don’t want your Operating Cash to dip, this cash flow forecast shows you that you need to be proactive. Do you need to send a courtesy email to a client who is consistently late with payment? Do you need to bring another client on board? Do you need to cut expenses somewhere? This is great insight into building and sustaining your freelance business, and you may not have realized it without doing this forecast.
Projecting for future months
Now that you’ve done one month, it’s a simple matter of filling in the blanks for subsequent months. By factoring in more assumptions (perhaps you want to pay yourself a bit more, you have months of heavier travel expenses, you expect another new client in a few months, etc), you have a data-driven forecast to work with:
Again, what do you see at a glance? Well, your Operating Cash isn’t changing much, which is probably a good sign since you’ve factored in an additional $500 a month for your salary starting in January. Are there adjustments you need to make? Does this money work out for you through the next 6 months? What about 12 months?
Keep in mind, you should revisit this forecast as things change. It will only get more accurate as you update past months to their actuals, and update assumptions with new information. If you use an accounting app like ours, you can refer to your profit/loss statement once a month for this purpose. And now that you have this living, breathing document of your cash flow, you can quickly make a change to a row and see how it affects your bottom-line 3 months from now.
Cash flow forecasting for freelancers shouldn’t be intimidating! Rather, it should be a small investment of your time and brainpower to make sure your business is heading in the right financial direction.
This article first appeared on Forbes on September 20, 2017.