First things first: this is not a whine (or a whinge). I love what I do, I love my current situation, I have not once had second thoughts about quitting my “day job” and starting my own business, and I am happy. I am also a realist and, as someone who has gone through the process of transitioning from an employee to a solopreneur, maybe now and then my insights could be useful to others contemplating taking the same road.
So, this is just a little glimpse into one potentially negative aspect of the lifestyle of being self employed and calling your own shots: cash flow stress.
When you’re an employee, in most cases you can expect to get a fairly predictable paycheck on a fairly predictable schedule. God willin’ and the creek don’t rise, you can plan around that income stream.
Not so in a case like mine. Let’s skip the scary periods when you don’t have any gigs at all (that’s a job for marketing, which is another topic entirely) and focus on the times when you actually have paying work in the chute. Malcolm Reynolds, the fictional caption of the Good Ship Serenity in the Firefly series and the eponymous follow-on feature film, had a saying well known by Browncoats:
I do the job…and then I get paid.
Well, in the real-life small business world it ain’t always as straightforward as lifting a bag of coins at gunpoint from the client who tried to stiff you. Yes, eventually (barring shyster clients trying to rip you off), you get paid—but not necessarily right away. If you’re smart (as I see it) you’ve collected between 25% and 33% up front as a deposit, but what happens once the job is done and you send that beloved money-bringing invoice off with breathless anticipation?
You wait. Sometimes you wait some more. From what I’ve seen a fairly standard term is payment due 30 days on receipt of invoice (if you’ve negotiated stricter terms good for you!). Some clients will hold you to every last squeaking second of that period (they have cash flow concerns as well, and the big fish like to collect those extra days of interest on their cash balances before they write that check), and others will just pay you when the wheels of their bureaucracy dictate little specks like you come up on their process queue and invoice terms bedamned.
For example: I periodically do consulting work for a major US defense contractor (you’d recognize the name, I am fairly sure). I track my hours spent on the project and send them weekly invoices for my billable time. Then I wait, sometimes six to eight weeks, for them to get around to paying those invoices. That means I am working for a month or more after a job starts with no income to show for it until their payment facilities catch up with me. Great gig? Sure! Does that initial delay put pressure on me when I get bills from utilities and creditors and vendors expecting to be paid within a couple of weeks? You bet!
The best way to mitigate these large gaps in your cash flow is to save as much as you can. When the bucks start rolling in (and as a personal aside right now I have five figures in outstanding invoices in my accounts receivable table. Quite nice but I have yet to see a dime of it) it’s tempting to do some comfort spending but, apart from paying down those bills that piled up while you were waiting to get paid, I counsel you squirrel away most of what’s left. Not only do you need to give Unca Sam his several pounds of flesh in self employment taxes come April (plus quarterly estimated tax payments), you need to have a ‘war chest” well filled to get you through those dry spells (even when you have gigs). A decent low-interest line of credit can certainly help smooth the bursty nature of your cash flow, but that is also a potential debtor’s pit rife with risk unless you use it judiciously. It’s a temporary buffer to be cleared asap, not an additional income source.
It’s not only the big fish who like to keep you waiting. Getting small local businesses to pay up in a timely manner can be a challenge, and sometimes you have to become quite the pest to nettle them into writing that check. As I mentioned above, they also have their cash flow concerns and you might have to weigh the balance between being understanding and being hard-assed about getting what is due you.
So, in summary, in this sort of work you need to expect uneven, bursty cash flow (presuming you’re thankfully generating one at all) and that means dealing with the financial uncertainty (and sometimes stress) of not knowing exactly when the next “paycheck” will come in. By all means: follow your dream, start that business, and take charge of your destiny—but have your eyes open and be prepared for (and make sure you know how to handle) a completely different style of financial management.
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