Tips for Living with a Fluctuating Cash Flow When You are Self-Employed (Part Two)
The way you manage your money is one of the first things you’ll change when you move from employment to self-employment.
You are moving from an environment where you received income in equal amounts at set intervals to one where your income fluctuates.
Managing money in such circumstances is both unfamiliar and uncomfortable for most of us.
These are some tips I developed from my experience of 10+ years of self-employment. • THOSE PESKY ESTIMATED TAXES Enter the land of self-employment and you enter the land of quarterly estimated taxes.
You pay estimated income taxes because the Government says you must. Since you no longer have an employer to withhold income taxes, the tax authorities want to make sure that you pay up.
One way to make sure you have money in-hand at the appointed time is to mimic what your employer used to do for you. Take a portion of money you receive and put it away. My solution is to put it into a separate savings account.
By keeping the money separate, you are less tempted to spend it. Then at tax, time, simply transfer it into your checking account and write the check.
It is less painful this way.
Having a method to manage tax payments is most important around April 15 when annual taxes from the previous year and first quarter estimates for the new year come due on the same day. • GETTING PAID Banks charge interest when they lend money. Very small businesses and self-employed people generally don’t. And if they do, they rarely collect. It is hard to lay down the law to slow-pay clients much larger than you and clients who give you a lot of business.
In fact some businesses make it a policy to pay their creditors slowly. They use your money, interest free, at your expense.
Slow-pay and no-pay clients cost you money and mess up your cash flow.
The subject of collections is worthy of a separate article – or book, in itself. But here are a couple of pointers.
Ask to be paid up front when possible. It’s done all of the time. Contractors get deposits and lawyers get retainers.
One piece of conventional wisdom is to have a policy to handle late payments. Set up a system to diary your outstanding invoices. Then follow up at scheduled intervals as needed. Keep a paper trail in case you have to take things further.
Stay on top of overdue billings and keep lines of communication open with the client. The longer a debt remains outstanding, the less likely you’ll get paid.
The squeaky wheel gets the grease. Be squeaky. • CREDIT CARDS Credit card debt can be a killer. Calling the interest rate levels charged on many cards ‘usury’ is not an overstatement. If you have credit card debt, pay it off as quickly as possible.
Nonetheless, credit cards are a necessity in this day and age. When you are on the right side of the credit card companies, credit cards can be a benefit.
You can track expenses by putting it on your card. That can be a real help when you have a lot of petty tax deductible expenses that add up over the course of a year.
If you use your card for this purpose, be sure to pay off your balance every month. • BUILD A FINANCIAL CUSHION For self-employed people, having a financial cushion is essential. It is a lifesaver when unexpected expenses come up, or expected income is slow to materialize. In addition, you may want to sock away funds for expected large expenses such as estimated tax payments.
If you can’t swing it in the beginning, build your cushion gradually. Put away money when times are good. Live lightly when times are not.
You‘ll find managing your money while being self-employed will get easier over time. You will get to know your cash flow patterns and adjust accordingly. As your business grows it will bring in more money, which itself, does a lot to make you more comfortable.