Employee-like cash flow for freelancers

Why do freelancers have cash flow concerns that employees do not?

It’s superficial and shortsighted to say it’s because employees get a paycheck every other week. Employees simply work for corporations, which are certainly not immune to cash flow problems. Things happen — missed payroll, delaying reimbursements, and layoffs — just to name a few that impact employee wallets / purses directly.

Even so, businesses with large quantities of employees do tend to be better at insulating their employees from cash flow problems in the business than freelancers are about insulating themselves from cash flow issues in their practices. Organizations of any substantial size are able to “roll with the punches” a bit more.

Why?

It seems big business has an advantage, but it’s only because they’ve engineered things that way. Alas, they do not have magical cash flow sources that I can reveal to you. What they do have is something close though: high-impact, proven strategies for improving the cash flow in any business situation.

Specifically, for increasing the likelihood that, at any given point in time, they’ll be able to cover the bills, pay employees, and keep in progress projects moving forward.

What a typical corporation has is options and flexibility. Even solo/small technical service businesses can have these things, but it has to be engineered just like it does for the big companies.

Let’s break down what a typical corporation has in its “cash flow toolbox.” Then let’s figure out exactly how we can replicate these in our own situation. Even a solo IT consultant can learn from this. I know because I am one and I have.

How cash flow is engineered in a typical corporation

Much of the flexibility in a bigger business comes from things that any organization of any reasonable size is expected to have. As smaller businesses — especially in my experience with solo IT freelancers, consultants, and service businesses — we often don’t think about these things. Or, more accurately, we don’t know how to make them happen. After all, we don’t have a professional and experienced Chief Financial Officer (CFO) who is dedicated to living and breathing cash flow and balance sheet data. At least I’ve never considered myself one …and I am the de facto CFO for my own business.

Some of the cash flow “levers” in a typical corporation

Here are some engineered cash flow levers available to a typical corporation. We need to identify them so that we can figure out equivalents for our own business activities.

It’s not necessary, by any means, that we have equivalents in our own business for every single one of these levers. It’s only necessary that we have some, and possibly add to them over time as our own business activities mature and our risks and needs change.

• Customer/client diversity (e.g. individual customer/client, different regions, etc.)
• Product/service diversity (e.g. multiple offerings appealing to different customers under different conditions)
• Capacity to borrow funds (e.g. lines of credit, bank loans, payable notes sold to investors)
• Capacity to raise money (e.g. equity sold to investors)
• Tangible assets to move around and/or sell (e.g. cash, physical assets, real estate, subsidiaries, etc.)
• Intangible assets to sell or license out (such as trademarks/patents, intellectual property, distribution rights, etc.)
• Dedicated as well as excess capacity – brains, energy, labor, manufacturing, or distribution capacity (e.g. dedicated management and staff with ideas, energy, and time to focus and tackle problems and opportunities as they come up)
• Planning and forecasting — tools, people, data to do it
• Budgeting — tools, people, and data to do it
• Ability to defer expenditures (e.g. maintenance, new capital expenditures, freezing of new hiring, delaying planned and in-progress  projects, etc.)
• Ability to delay payment — to vendors, contractors (!), and government
• Boosting marketing investments — in areas proven to have the highest (or the shortest, depending on which is more important) return on investment (while reducing investments in lower ROI, albeit still profitable, areas)
• Boosting sales efforts — just like marketing, focusing resources on areas proven to have the highest (or the shortest, depending on which is more important) return on investment (while reducing investments in lower, albeit still profitable, ROI areas)
• Creating limited time price incentives (e.g. for customers to buy now, for customers who pay earlier than typical, or for customers who buy in larger quantities than they normally would)
• Requiring payment before shipping product
• Requiring a set-up fee before delivering a new service
• A willingness to make investments for the long-term

These are just a few of the biggies. 

Engineering your own freelancing business for maximum cash flow flexibility

What lessons can be learned from what a typical large corporation does that can then be translated into things in your own consulting practice? Quite a few it turns out!

Here are some ideas:

• Diversify your client base
  • In quantity (e.g. if you have two clients, get three)
  • By industry (e.g. if all of your clients are in one industry, get one from another industry)
  • In revenue percentage (e.g. if one client accounts for >50% of your annual income, get another one)
  • By region (you get the picture)
  • By size (e.g. small business, large business)
  • By type (e.g. for-profit, non-profit, government)
• Diversify your engagements 
  • Lots of project work? Balance these out with more retainers.
  • Lots of retainers? Balance these out with some project work.
  • Lots of new clients? Increase the repeat business you get from past/existing clients.
  • Few new clients? Improve how you generate leads for new potential clients.
• When cash flow is good (or, at the very least, you have some cash in the bank), establish a credit line associated with your business that you can draw upon when needed
• Use your good personal credit history to establish one or two business only credit cards
  • Use these to pay bills/overhead and pay them back promptly, building up your credit profile for increased access to credit in the future
• Look at your expenses/overhead
  • Trim unnecessary subscriptions (including for software/services) expenses, even if you think you may want them later (you can always resubscribe later on if you don’t find alternatives in the mean time)
  • Give some thought during the good times to what expenses are most discretionary in case adjustments need to be made quickly
• Invoice your clients sooner and more often — don’t wait until the first. Switch to billing every other week or even every week. Bill immediately upon project completion as well.
• Require a portion of project fees be paid up front
  • 50% of the estimated total fee, if hourly
  • 50% of the total fee, if using fixed or value-based fees
• Offer a 10% discount for full payment, upfront, of the total fee
• Package up your services, expertise, or access to you in new ways then encourage clients to buy them by making it worth their while (e.g. buying hours in bulk, buying special access to you via email or phone, etc.)
• Defer investments not related to creating new revenue within <x> days
  • Where <x> is a criteria you set depending on how much of a crunch you are in
• No matter what, keep investing in your main client acquisition approach or you will put yourself in an even worse cash flow situation (e.g. in my practice I have one monthly activity that entails investing in a monthly mailing of a specific type to my house mailing list every single month; at most I skip one or two months per year)
• Re-focus resources constantly
  • Limit cash/credit use to investments in direct revenue generating activities, less on overhead and unnecessary things
  • Defer planned projects that aren’t in the top 1/2/3 (or whatever) in terms of near-term cash flow generators
• Look for low-risk, low-investment, high-potential opportunities to boost revenue – e.g. smart marketing arrangements such as joint ventures with complimentary businesses to do an endorsement to their own customer/client bases of your services with a special offer
• Manage your working capital / keep some cash in the bank

That’s just a start to get your brain used to the idea of thinking this way. Go back and look at the corporate list and brainstorm ways to adapt versions of the corporate approaches to your solo practice.

Let me know what you are doing to increase your cash flow, whether it’s on the above idea list or not.

Regards,
-jr