Cash flow, that is. My number one recommendation for anyone considering self-employment is to save a significant amount of money before you take the leap. Back up: It’s actually my number one life recommendation, regardless of employment status. You never know when you may need the flexibility to leave a job, living situation, relationship, etc. Always, always have a “walk-away” or emergency fund.
When I left my full-time job, I had enough stashed away to maintain my standard of living for more than 6 months, and likely could have stretched to 12 months if I’d cut back on my spending. I was lucky in that my business had virtually no start-up costs. I spent a couple hundred bucks for the basics to set up my website, ordered a box of $10 business cards, borrowed an aging printer/scanner from my dad, broke out my laptop/tablet hybrid, and I was good to go. My carrying costs were only my personal expenses.
That financial cushion allowed me the lead time to find clients I wanted to work with and stick to my pricing structure, while also alleviating a lot of mental anguish. I’ve mentioned in an earlier post how my plan was to price myself high enough to a) reflect my quality of work and b) allow me to work less than 40 hours a week on average. That wouldn’t have been possible without having savings to fall back on, because it takes longer to develop relationships and find clients that value the level of experience you can bring to the table, rather than solely looking at the bottom line.
The importance of keeping accessible capital available doesn’t go away once you’ve launched your business. Being self-employed comes with lots of benefits, but one of them isn’t the guarantee of a regular paycheck every two weeks. Long-term, ongoing or recurring client relationships are awesome, but they’re also hard to come by. Life as a small business owner includes constantly hustling for new clients.
It also includes tracking down payments. While I’ve found clients, on occasion, that are willing to agree to net-15, I typically have net-30 payment terms in my contracts. That means I could potentially go two months without receiving income from a client, if I’m billing at the end of the month. Even with those terms, the majority of my clients have also paid me late at some point. I include late payment clauses in my contracts, but try to avoid invoking them and taking the risk of damaging my client relationship. Also, clients rarely pay the late payment fee even if you do.
There are assorted reasons for late payments: the invoice got lost in their inbox, someone was on vacation, a change in payment processes/systems, etc. I’ve thankfully never been in a situation where I believed someone was intentionally dragging out my payment or intended not to pay me what I was owed. But, unintentional or not, late payments can be detrimental to your business, your personal life, and your mental health. You don’t want to be in a situation where you’re trying to figure out if you can pay your mortgage or not this month because of an accounting snafu.
Many, many people find themselves dealing with sub-par or even abusive clients, working for below their market rate, or desperately scrounging for clients due to lack of cash flow. Don’t be one of them. Protect yourself and your business by managing your finances and keeping funds on hand.
