6 strategies to improve freelance cash flow

The gig economy is booming.The main income of approximately 15 million Americans now comes from freelance Expected In 2020, 27 million Americans will join this number.

But as workers transition from employment to freelance work, they face many challenges—the key of which is cash flow. learn It shows that 35% of freelancers have serious financial problems, and 25% of freelancers who have been established for less than two years often face cash flow challenges.

A key problem for freelancers is that many of the cash flow-improving strategies available to other small businesses (such as raising prices or shifting inventory) do not work for them.

As a freelancer, you can practice the following six strategies to improve and manage cash flow.

Use your contract wisely

The first tool in your arsenal is your customer contract. Whether you have your own contract or are required to agree to a client’s contract-pay attention to the language and terms. If you have any questions, such as the frequency of invoices and payment terms, please speak up. Now is the time when you have the most leverage. Your client is eager to start the project and may be willing to make some adjustments to meet your needs. You may also want to join other items, such as termination fees, late fees, milestone payments, etc.

The trick is to avoid any ambiguities in the contract so that both parties know what to expect and what will happen if the contract is cancelled, you pay late or introduce scope creep in the contract.

Practice invoice hygiene

An important reason for freelance cash flow problems is not getting paid on time. Most customers have payment deadlines of 30, 45 or even 60 days. In addition, many customers still pay by check, which can easily add another week to the process.One Polls by Bill.com found that 54% of freelancers said their money takes a long time, and 45% said their customers did not pay on time.

To help reduce the risk of late payment, please issue invoices in a timely and accurate manner. If you can, don’t wait until the end of the month. Either bill your customers after the project is completed, or invoice twice a month (if your contract allows). Always include as many details as possible on the invoice to avoid delays or delays. Specify your working hours, hourly rate, PO number (if issued), project details, and your customer contact, so that accounts payable know who to seek approval. Most importantly, include your payment terms. This will provide you with additional leverage to catch up with late payments.

Finally, keep an electronic form showing all submitted invoices. Record the date, invoice number, customer, amount and item details, and whether payment has been received. Check your spreadsheet regularly and track down any overdue amounts.

Set aside funds for your estimated taxes

Estimated taxes are paid quarterly to the federal and state governments. However, many new freelancers did not realize that they had to pay these payments while working, and were found to be paying huge taxes at the end of the year. Even experienced freelancers can get into trouble if they don’t plan for these quarterly payments and find themselves experiencing unexpected cash flow crises.

The most effective way to avoid these two situations is to save at any time. Instead of pocketing your income and spending all of it, consider opening a separate bank account and deposit 30-35% of your income every month or on a schedule that suits you. You can then use this cash to pay estimated taxes without feeling stressed.

Consider forming an S company

Most freelancers are sole proprietorships. Although the administrative burden may be small, the tax obligations may be substantial. Sole proprietors pay 100% of the self-employment tax and levy taxes on all profits of the business, deducting deductible expenses-this can put tremendous pressure on your cash resources.

Form your business as a limited liability company (LLC), and Choose to become an S company In the eyes of IRS, it can help you save. When the structure is S company, as a business owner, you will be treated as an employee and receive a salary from your business profits. In this case, only your salary is subject to self-employment tax. The remaining profits are then distributed to you as dividends, and you need to pay personal income tax.

S company is not suitable for every freelancer. It all depends on your income level, your tax bracket, and your willingness to deal with additional paperwork and state government fees. You may also need to hire a tax consultant or accountant to help you perform all administrative duties. Talk to professionals before you make the leap.

Reduce your tax burden through SEP retirement plan

Another way to reduce taxable income, retain cash, and plan for the future is to open a simplified employee pension (SEP) plan or SEP-IRA. Unlike traditional IRA, SEP allows you to contribute more to the program every year—up to 25% of your total income or $57,000 (see IRS Latest contribution limit). Compare this to the current IRA limit of $6,000 (or $7,000 if you are 50 years old).

One of the great benefits of SEP is that you can change your contributions during the tax year until the tax day. If you have a profitable month, please continue to invest more money in your SEP (as long as you do not exceed the limit). In addition, all these donations are tax-deductible-which may help your cash flow position.

SEP is first a retirement strategy, but it is also very suitable for freelancers who care about cash on hand.

Use the credit line as your safety net

Every freelancer needs a safety net. However, if you do not have enough savings to tide over the difficulties when cash flow is tight, consider applying for a commercial line of credit.

business credit limit It is a useful tool to help freelancers overcome the cash flow gap without the complications of more traditional bank loans. You can borrow a pre-agreed amount from a financial institution when you need it, and repay it when you don’t need it.For example, with Fund box You can apply online and get a decision within a few minutes. If approved, you can withdraw funds at any time and transfer the funds to your account as soon as possible on the next working day. In addition, if you make early repayments, you can save money, and simply applying will not affect your credit score.

You don’t have to use the money right away, you can simply use the credit line as a safety net in case of unexpected cash flow problems. Unlike a commercial loan, you can also use the funds for any purpose-paying bills, marketing, etc.

Always pay attention to cash flow

You are very busy, with several jobs, and the demands of your customers are getting higher and higher-but remember, cash is king. Don’t wait until tough times to start worrying about cash flow. With careful planning, you can counteract the common cash flow traps of being a freelancer and become more comfortable and successful as a result.

Fundbox and its affiliates do not provide tax, legal or accounting advice. This material is for reference only and is not intended to be provided and should not be used as a basis for tax, legal or accounting advice. Before conducting any transaction, you should consult your tax, legal and accounting advisors.