As a self-employed professional, knowing how to manage and improve cash flow is essential. When it's positive, you can get the job done – you’ve got the skillset, and you take pride in your work. When cash is short, though, it can be challenging to operate – and headaches are inevitable.
Also, since 82% of small businesses fail due to cash flow problems, what can you do to protect yourself?
A few core money management skills can go a long way here. At first glance, they may seem daunting. However, during this time of uncertainty, now more than ever, it’s essential to learn best practices to survive these tough times and continue growing your business for years to come.
This straightforward guide will help you take steps to keep your business moving, whether you’re newly self-employed or have been at it for years. Each of these 5 tips will include the foundational steps to get started, as well as some more advanced cash flow strategies. Taking action on even one of these can lead to a big win for you, especially over the long term. Here we go:
1. Create an official budget to improve cash flow
Let’s be honest: the first thing that happens anytime someone mentions a budget is people’s eyes start to glaze over.
It’s one of those things we know in the back of our mind that we should probably do – but it’s easy to put off. Also, chances are that part of the reason you’re self-employed is that you wanted more freedom. You want to be doing work you love, not in front of a computer reviewing spreadsheets.
But it doesn’t have to be a painful process. Budgets have significant benefits and don’t require a ton of time to do right — especially if you have the right tools for the job. They’ll give you a measuring stick to evaluate challenges, help you work towards your goals, and assess your business’s overall performance more accurately.
Also, unforeseen expenses rank as one of the top challenges for smaller businesses. Knowing exactly how much money is coming in and out can help you have more peace of mind.
If you don’t have an official budget yet, don’t worry – you’re not alone. 74% of small businesses with less than ten employees don’t have one. The good news is this means you may have some low-hanging fruit to improve cash flow.
Here’s how to get started:
Step 1: set up a separate business bank account
Already have one? Great! If not, it’s an excellent idea because keeping personal and business accounts separate can help you avoid confusion, especially as your business grows. Even if you’re the only person in your company, keep business and personal accounts separate. If you're an Invoice2go, an Bill.com company, subscriber, we're excited to announce Invoice2go Money – our own zero-fee banking for small businesses.
Step 2: get started with a balance sheet
This is the backbone of your company’s finances. It will give you a snapshot of your resources and help you keep track of your cash flow projection.
Remember: you don’t need to be a finance wiz to manage this – so don’t let it intimidate you. The US Small Business Administration puts out a great resource to help you get started. If you’re an Invoice2go subscriber, the Invoice2go app also has features that help you track your expenses and generates monthly reports.
Whatever method you choose, once you enter all your financial information, you’ll be able to better account for all your costs. It also can enable you to track assets (equipment you own and use on the job), liabilities (money you might owe), and equity (assets minus liabilities).
Great! Now you’ve opened the door to see where your company can save money. You know the current state of your cash flow, and you can project how much you will have in the future.
Step 3: use a cost-benefit analysis when making important decisions
After your budget is in order, you have another powerful tool to aid your decision making. This analysis empowers you to quickly and more clearly weigh the financial strengths and weaknesses of the business choices you plan to make.
It’s simple to use. Add dollar amounts in projected benefits and costs over a specific period, then subtract costs from benefits to determine if the choice will add value. You can also items not directly related to money, like morale or stress reduction.
For example, let’s say you’re unsure whether to buy or rent an expensive piece of new equipment. You could crunch the numbers and compare the costs over time. Whatever you choose, you’ll have more confidence that you’ve chosen you’ve made an informed decision.
2. Require an upfront deposit for ALL your projects — with no exceptions!
Requesting a deposit before you begin work is another excellent way to generate consistent cash flow for your self-employed business. Whether you’re working a small, one-off job or taking on a long-term project, it formalizes your commitment with your client, protects you from unexpected out-of-pocket expenses, and keeps cash flow positive.
There’s nothing worse than landing a big project, investing large amounts of your time and money, then running out of cash before you can submit the invoice. Depending on the type of work you do, you may also need specialized equipment. The frustration of being stuck in a job requiring additional tools only builds when you need to reach into your pocket to cover those costs.
Requesting a deposit can be uncomfortable at first, but clients will respect your professionalism. Here’s how to do it:
Provide a total-cost estimate upfront
This is essential. You can then structure your deposit and specific payment schedule around it. We’ll get into more detail about setting payment schedules in a few paragraphs. For now, let’s focus on how to make sure your estimates are accurate.
Both overestimating and underestimating costs can lead to cash flow problems – so strive for accuracy. Many tools can help you here. For example, if you use Invoice2go’s app, there is a feature that lets you easily enter information as you do your onsite walk-through with your client.
Then, you can then immediately compile an accurate estimate on the spot with your client. This has the added bonus of helping you win more jobs since speed and professionalism go a long way when it comes to first impressions.
Digitally request a deposit based on your estimate
Typically, the larger the project is, the bigger the deposit should be. However, you can work with your client to reach an agreement that works for both of you. Ideally, create a win-win where the customer doesn’t feel hesitant, and you have enough to cover your expenses.
Again, many small business tools can help you here. Our app can also help you to instantly request a deposit based on your approved estimate. To encourage customers to pay the deposit by a specific date, you can even add a small discount as an incentive.
3. Outline clear payment expectations in your contract and make payments convenient for clients
If you use the Invoice2go app, your approved estimate and deposit will serve as your contract. This will clearly show your customers when and how to pay their invoices.
Accepting mobile and digital payments can positively affect your cash flow. They make it easier for clients to make payments, help you get paid faster, and make tax filing less of a headache. Also, if a client is running late with a payment, it’s easier for them to meet the deadline if they can pay online.
Always send your invoices — and payment reminders — promptly
If you’re busy running a business by yourself, the last thing you want to do after a long week is to manage extra paperwork. Sending your invoice immediately upon the job’s completion is the easiest way to get paid fast. If your client is dragging their heels with payment, prompt payment reminders can make all the difference in managing your cash flow.
The good news here is that you can automate your invoices and payment reminders through an app like ours. Make sure to set this up, so you can spend more time doing the work you love, and less time at a desk.
Offer incentives that encourage customers to pay on time
In addition to making sure clients receive invoices quickly, consider incentives. Some construction, outdoor services, or home maintenance companies offer a small discount if the client pays before the invoice is due. If you decide this could be useful for your business, just make sure it’s noted clearly on the invoice. Alternatively, you could charge interest or a small fee for customers that miss deadlines.
Maintain positive communication and build long-term relationships
Change orders are common in many lines of work. Customers often change their minds after a project begins and that can mean new requirements and different materials. Be sure to process these immediately to ensure you get any additional money quickly and keep your cash flow in the black.
Maintain positive communication and build long-term relationships
Hopefully, you’ll always have great clients that pay you on time and in full. But what do you do if that’s not the case?
While friendly automated reminders usually can do the trick, if you need to talk to a client personally, be sure to keep a calm, professional attitude. Let the client know their options based on your contract. Always keep it professional.
4. Build up your emergency fund
Especially during tough economic times, it can seem crazy to talk about saving money. Even when times are good, many can find it hard to stash extra cash.
While saving money is often easier said than done, adding an emergency cash reserve of three to six months’ worth of expenses will help to ensure your self-employed business has enough to stay afloat if you hit a rough patch.
Small businesses are advised to keep at least 10% of annual revenue in the bank. So if your business brings in $100, 000 per year, you’d put away $10,000 for a rainy day.
However, if 10% sounds impossible for you – don’t worry. Even 1% will grow over time and can save you from stress down the road. You can always start small now and then change how much you save later. You’ll be thankful later when a large, unexpected expense comes up, and you don’t have to take on debt.
With all the work you need to get done, you don’t want to have the additional task of managing your bank account each month. We recommend setting up automatic transfers so you can just keep on working while your funds grow. Some banks even give you the option of having small amounts taken out of every transaction you make and depositing them into your savings.
Automate your savings
Remember, starting small is better than not starting at all. Even a savings of 5% of each check you earn, or a small deposit with each transaction, begins to grow in time.
Save more during peak times
Depending on your industry, peak times can vary significantly over the year. You must plan for ebbs and flows. For example, let’s say you know business is usually stronger during spring and summer. If possible, save more during this time, so that you can relax and enjoy the slower parts of the year. This habit can help you stay on track for year-round financial stability.
5. Improve cash flow by negotiating with suppliers and spreading out costs when possible
Don’t shy away from negotiations with your suppliers. Remember that they want your business and are often willing to work with you. If you’re able to lower supply costs – boom – you’ll free up some cash.
Steep costs often come with the materials and equipment you need to get the job done. Before making big purchases, talk to several suppliers, and compare offers. Asking for flexible payment options can work to spread out your costs and improve cash flow.
Although you need supplies and equipment all year, some months are busier than others. Consider negotiating a contract that allows you to pay more during busy months, and scale back payments when business is slower.
Becoming more effective with money management can help you discover ways to improve cash flow and maintain a robust self-employed business. Also, as you streamline your business processes, you will likely have more bandwidth to expand your workload. The more customers you’re able to take on and keep happy, the more money you will see coming in. Ultimately, you’ll spend more time doing the work you love and less time dealing with paperwork and headaches.
Congratulations – you’ve just taken some of the most essential steps to improve cash flow and build a stronger business. Even if now is a slow time for your self-employed business, you’re taking steps towards a better future. Keep it up.