Tales from the Self Employed: Cash Flow

“When I was suckling at the corporate teat, my money came with reassuring regularity. Unless it stopped completely. But now I’m self-employed, my money comes when clients decide to pay me. But what hasn’t changed are the dates when I’m supposed to pay my bills.”

Regular income and bills make cash flow easy. You know when and how much money will be coming in. You have an idea of the amount for your regular bills. But then you decided to become self-employed and throw the whole system into chaos. Some clients pay promptly, and others need the threat of a knee-capping to pay your invoice. Some clients pay monthly for ongoing services, while others pay at the end of a project. But your mortgage company still expects you to pay by the 10th of every month, or you’ll get their equivalent of a knee-capping – aka late fees and a negative mark on your credit report.

What is the best cure for chaotic cash flow? A cash cushion.

This cash cushion is at least one month’s worth of expenses. And a separate cushion for personal expenses and business expenses. Since they are separate accounts, right? Because you are not mingling business transactions with personal transactions, right?

To set this up, you first need to know how much you spend each month. Read one of my past articles for an exercise that lets you know how much you spend each month.

Once you have your cushion numbers, build to this amount in your checking account in addition to the money you will use to pay the current month’s expenses. Ideally, your account balance should never drop below the cushion number – or not drop for too long. If you have to tap this cushion temporarily because of a late client payment, build your balance back to your cushion number as soon as you can.

This cash cushion is not your emergency fund, home repair fund, travel fund. It’s just a cash flow tool to allow you to pay bills on time. To keep your creditors happy and not tacking on extra fees, jacking up interest rates, cutting off services, or sending burly, but handsome men, to your door with thumbscrews.

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