Let’s look at the first concept we met at the very start of this chapter in more detail: operational cash flow. You may feel great sending out all those invoices; however, those sheets of paper won’t help pay your expenses. The proof is in the pay ments—and it’s when they actually arrive in your bank account that matters. As we’ll discuss, not all businesses are keen to abide by your terms of payment.
When funds are tight, it’s imperative that you do what you can to balance the income and outgoings so that you’ll always have money available in the bank. It’s a good practice to adopt from the very start, and continue into the future.
You should concentrate your efforts on:
reducing the average collection period
This is the time that lapses between the invoice going out, and the payment being received.
reducing the risk of bad debtors
Nobody likes the idea that some clients may never pay!
budgeting for future expenses
It’s probably not necessary to buy that shiny new gizmo right now. Create a cash flow plan, and determine the best time to make a purchase.
timing your outgoing payments
Ensure that you have a credit period with purchases, and that you use this wisely.
It isn’t just when you’re beginning your freelance career that cash flow is such a crucial element. Ask any business owner, and they’ll agree that controlling cash flow is an ongoing challenge—the failure of which can cripple any organization, whatever the size.
Three Types of Cash Flow
There are three types of cash flow in business. Operational cash flow is cash re ceived or spent for a core business activity. This is the type of cash flow most applicable to freelancers.
Financing cash flow is cash received or expended as a result of financial activities, such as interests or dividends. Investment cash flow is cash received or spent on investments, acquisitions, and capital expenditure. The latter two are typically not so relevant to freelancers.
Encouraging Prompt Payment
One of the biggest issues that many freelancers face is being paid on time. The consequences of waiting months for a large bill to be settled—especially when it’s payment for a job that took up all your resources for a significant period of time and prevented you from taking on smaller fry to keep you going—can be severe. You need to be prepared for such eventualities as best you can, with enough savings and cash flow to tide you over.
It’s often the case that the larger the organization, the quicker their clients pay, due to the fact that larger organizations employ people to chase down their debtors. Unfortunately, these larger organizations are also typically the ones that are slowest at paying their own bills.
You can encourage prompt payment from clients by using a number of strategies. Ensure that you invoice as frequently and as quickly as possible. You can arrange milestone payments at the start, during the project, and at the end. Smaller invoices are normally far more palatable than larger ones, so invoice early and often.
Ensure you cover every detail on your actual invoice, so that you minimize queries. These details should not only cover all of your legal and contact information, but also explain the charges and provide a brief description of the work, as well as the date incurred, if it’s maintenance or support. Most importantly, ensure that your payment terms are clearly stated and are obvious to the recipient. Consider making them big and bold. For a sample freelance invoice, see this book’s web site for a
downloadable example.2
Find out the name of the person in the accounts department, and address the invoice accordingly. This way, there should be no excuses about the paperwork going astray or not being addressed to the person with the right authority. If you don’t have any luck with the accounts people, politely mention it to the person or people you’re dealing with on the project, if it’s ongoing. They may be able to get the wheels in motion to ensure your willing continuation with the project, and to keep the rela tionship sweet.
Communicate frequently, and with consistency. If the invoice was due yesterday, email or call the client today and politely ask when payment will be received. Take a note of their response, and set a reminder to call again close to the date they nominated. Clients will quickly learn that if the account is still outstanding on the due date, they can expect a call from you.
Avoid setting unrealistic payment terms. Many companies will simply ignore pay
ment terms if they are less than 14 days. Similarly, they will sit back and wait for
a statement or follow-up if you give 90-day terms. Find a nice window (I typically use 30 days) which most clients will stick to, and avoid changing your payment terms for difficult clients, without a very good reason (or additional loading!).
2 http://www.sitepoint.com/books/freelancer1/
Discounting to Save Headaches
Some businesses and freelancers offer a small discount if the invoice is paid by a certain date, or is prepaid. I’m not a big fan of this approach, but many other freelancers report considerable success this way. My main concern with offering this carrot is that you could open yourself to arguments when a client pays after the due date, but still insists upon receiving the discount that they now look upon as your expected, standard rate.
Dealing with Debtors
When faced with a debtor who just isn’t paying up, there’s always a temptation to inflame the situation by pulling out that jousting equipment beloved of our freelance forebears. Don’t! Approaching the situation with discourtesy, aggression, or threats simply won’t work; it will only escalate the issue into a personal grudge and bring any negotiations to a standstill.
The best approach is to be firm about your expectations and agreements, and ensure that you present this message in a written form. Inquire about the delay in payment with the person you’ve been dealing with, ask about whether there are any issues, and see what you can do to resolve them.
If absolutely necessary, agree on a payment plan—even though this won’t help your short-term money needs, it’s better to at least have a trickle of the money coming in than no money at all. And you’ll often find that the mere insinuation that a client can’t pay their bills will lead to them paying up in order to save ego.
If there’s still no resolution, consider engaging a debt collection agency—typically, they will take a percentage fee from the overall invoice, if they’re successful in collecting the sum owed to you. In my opinion, it’s better to salvage 80–90% of the total cost than none at all.
When You Need to Get Tough
An important consideration is that debts become harder to recoup the longer they exist, so it’s vital to act quickly with recalcitrant clients. If all negotiations fail, look at options such as locking troublesome clients out of their CMS, delaying any remaining work until they have paid you in full for your work to date, or as an absolute last resort, turning off their web site hosting.
Recurring Revenue
Regardless of whether you’re charging by the project or by the hour, an income stream that shouldn’t be overlooked is that of recurring revenue, also known as “passive income.”
Let’s consider a quick example. Say we bought hosting accounts for $12 per month, and we could sell them to our clients for $20 per month. But, you might say, that’s a whole $8. It’s not going to change my life!
Well, what about an average of two clients a month signing up for your hosting? This means that after two years, you will have 48 sites hosted on your reseller hosting account. This works out to a rather nice $384 per month—for doing very little.
Now, let’s add domain names, secure certificates, and other add-on items into this equation, and I’m sure you’ll really start to see value in the proposition.
Can you build a web application? An important opportunity for those who create products, such as content management systems or web apps, is to reduce any upfront costs of the installation—which therefore makes it more affordable and attract- ive—and build in an annual, recurring licensing fee. This is an example of the power in numbers—ten clients paying $200 a year for CMS licensing means an extra two thousand dollars per year in passive income.
This principle isn’t just for hosting, domain names, and applications, of course. There’s a multitude of items from which you can create products, and sell over and over again. Consider such items as membership sites, advertisement-funded sites
(a successful blog is a good example), or sales of photographs and illustrations on stock design sites such as iStockPhoto3 and BigStockPhoto.4
Then there’s writing an ebook for sale, designing T-shirts and other designer items and selling them through sites such as RedBubble5 and Spreadshirt,6 developing web-based applications, or even creating web site design templates for sale.
When funds are tight, it’s imperative that you do what you can to balance the income and outgoings so that you’ll always have money available in the bank. It’s a good practice to adopt from the very start, and continue into the future.
You should concentrate your efforts on:
reducing the average collection period
This is the time that lapses between the invoice going out, and the payment being received.
reducing the risk of bad debtors
Nobody likes the idea that some clients may never pay!
budgeting for future expenses
It’s probably not necessary to buy that shiny new gizmo right now. Create a cash flow plan, and determine the best time to make a purchase.
timing your outgoing payments
Ensure that you have a credit period with purchases, and that you use this wisely.
It isn’t just when you’re beginning your freelance career that cash flow is such a crucial element. Ask any business owner, and they’ll agree that controlling cash flow is an ongoing challenge—the failure of which can cripple any organization, whatever the size.
Three Types of Cash Flow
There are three types of cash flow in business. Operational cash flow is cash re ceived or spent for a core business activity. This is the type of cash flow most applicable to freelancers.
Financing cash flow is cash received or expended as a result of financial activities, such as interests or dividends. Investment cash flow is cash received or spent on investments, acquisitions, and capital expenditure. The latter two are typically not so relevant to freelancers.
Encouraging Prompt Payment
One of the biggest issues that many freelancers face is being paid on time. The consequences of waiting months for a large bill to be settled—especially when it’s payment for a job that took up all your resources for a significant period of time and prevented you from taking on smaller fry to keep you going—can be severe. You need to be prepared for such eventualities as best you can, with enough savings and cash flow to tide you over.
It’s often the case that the larger the organization, the quicker their clients pay, due to the fact that larger organizations employ people to chase down their debtors. Unfortunately, these larger organizations are also typically the ones that are slowest at paying their own bills.
You can encourage prompt payment from clients by using a number of strategies. Ensure that you invoice as frequently and as quickly as possible. You can arrange milestone payments at the start, during the project, and at the end. Smaller invoices are normally far more palatable than larger ones, so invoice early and often.
Ensure you cover every detail on your actual invoice, so that you minimize queries. These details should not only cover all of your legal and contact information, but also explain the charges and provide a brief description of the work, as well as the date incurred, if it’s maintenance or support. Most importantly, ensure that your payment terms are clearly stated and are obvious to the recipient. Consider making them big and bold. For a sample freelance invoice, see this book’s web site for a
downloadable example.2
Find out the name of the person in the accounts department, and address the invoice accordingly. This way, there should be no excuses about the paperwork going astray or not being addressed to the person with the right authority. If you don’t have any luck with the accounts people, politely mention it to the person or people you’re dealing with on the project, if it’s ongoing. They may be able to get the wheels in motion to ensure your willing continuation with the project, and to keep the rela tionship sweet.
Communicate frequently, and with consistency. If the invoice was due yesterday, email or call the client today and politely ask when payment will be received. Take a note of their response, and set a reminder to call again close to the date they nominated. Clients will quickly learn that if the account is still outstanding on the due date, they can expect a call from you.
Avoid setting unrealistic payment terms. Many companies will simply ignore pay
ment terms if they are less than 14 days. Similarly, they will sit back and wait for
a statement or follow-up if you give 90-day terms. Find a nice window (I typically use 30 days) which most clients will stick to, and avoid changing your payment terms for difficult clients, without a very good reason (or additional loading!).
2 http://www.sitepoint.com/books/freelancer1/
Discounting to Save Headaches
Some businesses and freelancers offer a small discount if the invoice is paid by a certain date, or is prepaid. I’m not a big fan of this approach, but many other freelancers report considerable success this way. My main concern with offering this carrot is that you could open yourself to arguments when a client pays after the due date, but still insists upon receiving the discount that they now look upon as your expected, standard rate.
Dealing with Debtors
When faced with a debtor who just isn’t paying up, there’s always a temptation to inflame the situation by pulling out that jousting equipment beloved of our freelance forebears. Don’t! Approaching the situation with discourtesy, aggression, or threats simply won’t work; it will only escalate the issue into a personal grudge and bring any negotiations to a standstill.
The best approach is to be firm about your expectations and agreements, and ensure that you present this message in a written form. Inquire about the delay in payment with the person you’ve been dealing with, ask about whether there are any issues, and see what you can do to resolve them.
If absolutely necessary, agree on a payment plan—even though this won’t help your short-term money needs, it’s better to at least have a trickle of the money coming in than no money at all. And you’ll often find that the mere insinuation that a client can’t pay their bills will lead to them paying up in order to save ego.
If there’s still no resolution, consider engaging a debt collection agency—typically, they will take a percentage fee from the overall invoice, if they’re successful in collecting the sum owed to you. In my opinion, it’s better to salvage 80–90% of the total cost than none at all.
When You Need to Get Tough
An important consideration is that debts become harder to recoup the longer they exist, so it’s vital to act quickly with recalcitrant clients. If all negotiations fail, look at options such as locking troublesome clients out of their CMS, delaying any remaining work until they have paid you in full for your work to date, or as an absolute last resort, turning off their web site hosting.
Recurring Revenue
Regardless of whether you’re charging by the project or by the hour, an income stream that shouldn’t be overlooked is that of recurring revenue, also known as “passive income.”
Let’s consider a quick example. Say we bought hosting accounts for $12 per month, and we could sell them to our clients for $20 per month. But, you might say, that’s a whole $8. It’s not going to change my life!
Well, what about an average of two clients a month signing up for your hosting? This means that after two years, you will have 48 sites hosted on your reseller hosting account. This works out to a rather nice $384 per month—for doing very little.
Now, let’s add domain names, secure certificates, and other add-on items into this equation, and I’m sure you’ll really start to see value in the proposition.
Can you build a web application? An important opportunity for those who create products, such as content management systems or web apps, is to reduce any upfront costs of the installation—which therefore makes it more affordable and attract- ive—and build in an annual, recurring licensing fee. This is an example of the power in numbers—ten clients paying $200 a year for CMS licensing means an extra two thousand dollars per year in passive income.
This principle isn’t just for hosting, domain names, and applications, of course. There’s a multitude of items from which you can create products, and sell over and over again. Consider such items as membership sites, advertisement-funded sites
(a successful blog is a good example), or sales of photographs and illustrations on stock design sites such as iStockPhoto3 and BigStockPhoto.4
Then there’s writing an ebook for sale, designing T-shirts and other designer items and selling them through sites such as RedBubble5 and Spreadshirt,6 developing web-based applications, or even creating web site design templates for sale.
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