Poor financial wellbeing is a major concern for freelancers, according to new research. But, with some careful planning and good financial habits, you can secure your financial future and focus on doing what you do best.
According to the Association of Independent Professionals and the Self-Employed (IPSE), 77% of freelancers were concerned that the money they have will not last. And, more than a third (36%) do not feel secure in their financial future.
These concerns are damaging performance with half (51%) reporting that they feel anxious or stressed about finances, 34% saying they’ve lost sleep and one in three (33%) reporting a lack of confidence.
Worryingly this could mean that self-employment is not sustainable for some.
The Path to Prosperity report found that 45% had considered giving up self-employment, and 44% said they had taken up work they wouldn’t normally consider to make ends meet.
Does this sound familiar?
Unfortunately, irregular income and late or non-payment can make it challenging for freelancers to keep on top of their finances.
But, it’s not impossible.
With some careful planning and good financial habits, you can improve your cash flow and secure your financial future.
1. Forecast for multiple scenarios
Cash flow forecasting can be a great way to monitor your cash flow and identify any upcoming cash flow gaps.
Unfortunately, because the numbers needed are based on predictions rather than actual figures, many freelancers can find this process challenging, particularly when earnings may differ greatly each month.
A good way to counteract this uncertainty is to forecast multiple scenarios.
Use historic data to find an average scenario or take an educated guess at a base scenario if you’re newly self-employed.
Then create one scenario with 10% higher sales and another with 10% lower.
You may want to alter the percentages slightly if you often see big deviances in sales.
This will give an indication of the best and worst case outcomes of any given month and will show how your finances may be impacted.
2. Regularly update your budget
Do you have a business budget?
Many freelancers don’t and even those who do often don’t use it to its full effect.
When used correctly a business budget can help you to set out goals, track your progress and save money to secure your financial future.
But in today’s turbulent economy, with so much uncertainty and wide-spread late payment, simply having a budget isn’t enough.
It needs to be a living and breathing document that adapts with your business.
So, each time your cash flow projections change you should update your budget to accurately reflect your business and its changing needs.
This will ensure that your budgeting and saving capabilities remain stable even when your income fluctuates.
3. Monitor your spending
Outgoings can easily mount up so, whilst it may be time consuming, always make sure that you monitor your spending effectively.
First, analyse every expense and consider what impact that is having on your performance.
If it isn’t contributing to your success, either now or in the longer term, it’s probably wasted money.
Don’t forget the small expenses in this process. All those small costs quickly add up to become a large expense.
Then prioritise all your outgoings by splitting them into essential expenses, such as payroll, bills and taxes, and non-essential costs, which aren’t necessary for your success.
Then rank them in order of importance.
This ensures that the most critical expenses come first and the others can be put aside until you are in a position to splurge without jeopardising your finances.
4. Fight back against late and non-payment
Other recent research from IPSE found that 43% of freelancers have done work they were not paid for, a figure that rises to 58% among 18- to 24-year-olds.
Combine this with the shocking late payment statistics that are now commonplace and it’s not surprising that many freelancers are finding it difficult to manage their finances.
This highlights the increasing importance of implementing an efficient credit management strategy to reduce the impact that late or non-payment can have on your cash flow.
There are a number of strategies you can implement throughout the credit cycle to help you fight back against these poor payment practices.
Try using account opening forms, credit checks and online research to ensure that you only work with people who can and will pay for your services.
Also, update your terms and conditions and your invoices to include your late payment procedure so that your customers know poor payment will not be tolerated from the start.
And then, if an invoice does go overdue, consider using all the tools available to you such as charging late payment interest or outsourcing the debt to a commercial debt collection agency to encourage them to pay sooner rather than later.
If you don’t have the time or the resources to dedicate to effective credit control you could benefit from outsourcing this task to the experts.
Whilst this will come at a cost it will often be considerably less than what you might lose through non-payment if you don’t have any help at all.
5. Always have a plan B
Even the most prepared freelancers can find their financial future threatened when suddenly presented with a late payment or unexpected expense.
That’s why it’s vital that you always have a back-up plan.
Firstly, whenever you find yourself with excess profits it’s good practice to reserve some of this for emergencies or slow income periods.
Also, ensure that you have adequate insurances to mitigate any potential disasters and limit the damage to your business and your finances.
As well as this, it’s often wise to consider alternative sources of finance so that if a crisis hits you already have the information available and can make quick decisions to secure your financial future.
It’s a good idea to revisit this information regularly as the most suitable finance options for you will change as your business and the market evolve.
6. Consider your funding
When starting out, many freelancers self-fund their business or seek financial help from their family or friends. Whilst this can be a good way to get started with limited risk it’s often not very sustainable in the long term.
Similarly, those who do seek external funding often secure a facility and then stick with it, even when it’s no longer suited to their requirements.
Whilst it might seem like any source of funding is helping towards your financial future, in reality having the wrong funding in place could actually be doing more harm than good.
This is why it’s vital to carefully consider your funding.
With so many options to choose from, finding the most suitable facility for your needs can be challenging but there is help available. For example, a good commercial finance broker can help with this process. They will take the time to get to know your business and its ambitions and then use their extensive knowledge of the market to highlight the most suitable solutions for your requirements.
7. Don’t delay
With so many things to think about and unsure of where to turn for support, many freelancers put off doing anything to secure their financial future.
But this is only adding to the problem.
The research clearly shows how damaging money worries can be so don’t wait to get your finances into shape.
Start taking the steps now to ensure that your forecasting, budgeting and spending remain in the best condition possible to allow you to achieve your goals.