How To Manage Cash Flow: Guide For Freelancers & Agencies

Running out of cash is bad for business.

Understatement of the year, right? Small businesses are notorious for running into cash flow problems. Even if you’re hardworking and diligent, you can still run into this problem just because of the unsteady revenues and expenses that come along with freelance and agency work.

How exactly do you manage cash flow in a freelance or agency business? It’s a complex question, because you have to be able to cover your expenses while having enough money left over to invest in growth.

But despite the steep learning curve, you can master cash flow management. In this guide, I’ll provide some practical steps you can follow to gain better control over your finances and set your business up for financial stability.

Quick Note: As with my other posts, my assumption in writing this is that you’re in the US, running a freelance or small agency operation. You’re probably a sole proprietor or single-member LLC. Much of this post will still apply even if you do not meet these criteria.

What is Cash Flow Management?

Cash flow management is all about tracking how money moves in and out of your business. The goals of cash flow management are to make sure you can cover expenses, pay bills on time, and invest in the future growth of your business.

If you’re good at cash flow management, you can handle financial crises and keep your business stable. If you’re bad at it, you’ll often find yourself trying to make extra money quickly, which is stressful and not good for long-term business growth.

Much of cash flow management comes down to timing. That is, figuring out when expenses are paid and when revenues will come in. If you can stay on top of cash flow, you will be able to make smarter decisions, stay out of debt, and ward off stress.

14 Steps To Manage Cash Flow: Guide For Freelancers & Agencies

It’s not hard to see why cash flow management matters for freelancers and small agency owners. But knowing how to actually manage cash flow is harder.

To help you take meaningful action, I’ve compiled this list of steps. Follow these and you can make substantial and immediate progress toward your cash flow goals.

1. Track your income and expenses.

If you don’t know what you’re making and what you’re spending, you can’t manage your cash flow. That means the first thing you need to do is learn to track business revenues and expenses. You can learn more about how to do that in this guide on tracking business expenses.

The basic concepts are straightforward. Set up accounting software, connect your accounts, and categorize your transactions on a regular basis. That way, you can see where your money is coming from and where it’s going, and you can create income statements when you need them.

Easy Step 1: Read our guide on How To Track Business Expenses For Freelancers & Agencies.

2. Come up with clear financial goals.

Monitoring your cash flow is useful, but you’ll get a lot more out of your efforts if you have specific financial goals in mind. Ask yourself what you’re most interested in: growing the company, increasing your financial security, or improving your lifestyle.

Once you choose a broad direction, you can then establish more specific financial goals. Specific goals might including saving up $10,000 in your emergency fund, generating $250,000 in revenue in the next year, or being able to take a two-week vacation without working.

Easy Step 1: Read our guide on How To Set Financial Goals: Guide For Freelancers & Agencies.

3. Create a budget.

Once you start tracking your income and expenses, creating a budget is the next logical step. Cash flow management requires you to be able to predict revenues and expenses with a fair degree of accuracy. You can’t do this without a budget.

Start by listing all your sources of income and expenses. Once you do that, you can start setting specific revenue and expense targets by category. That will allow you to see if you’re failing to meet revenue targets or if you’re overspending in one or more areas of your business.

Easy Step 1: Read our guide on How To Make A Budget: Guide For Freelancers & Agencies.

4. Set clear invoicing terms.

Unless you charge upfront, you can never tell entirely when your clients are going to pay. That means there will always be some risk of late payments or getting stiffed outright. You can mitigate these risks some, but you can never entirely eliminate them.

To minimize payment issues, you need to be very clear with clients on the following invoicing terms:

  • Due dates
  • Acceptable payment methods
  • Late charges

Clear invoicing terms set expectations and encourage clients to pay on time, which will help reduce payment issues.

Easy Step 1: Clearly define and communicate your invoicing terms to clients.

5. Build up your cash on hand.

You need to have some liquid cash in the bank for unexpected expenses. Sometimes you will lose clients, or your laptop will break, or you’ll get the flu and not be able to earn for two weeks. Life happens!

Try to save up enough money to cover 90 days of business expenses with your business account. Also try to save up enough money to cover 3-6 months of personal expenses in your personal account.

Saving up large sums of money can take a long time, so don’t be afraid to work your way toward these goals incrementally. You don’t have to do it all in one day!

Easy Step 1: Set up automatic transfers to a savings account.

6. Monitor your accounts receivable and payable.

Accounts receivable are payments that clients owe to you for work have provided. Accounts payable are payments that you owe to others for services they have provided. You need to keep an eye on both.

Pay attention to when clients’ invoices are due and when you need to pay your bills. Keep a calendar to make sure cash comes in and goes out when it needs to. Do this even for autopay bills, which sometimes fail to work as they ought to!

Easy Step 1: Regularly review accounts receivable and payable.

7. Follow up on unpaid invoices.

This is probably the least fun part of freelancing or agency work, but you have to do it. Timely follow-up on unpaid invoices is crucial for maintaining a steady cash flow.

Start by sending reminder emails as the due date approaches and immediately after it passes. If enough time passes and you haven’t been paid, follow up with a phone call to the client.

Be polite but firm, and clearly state the overdue amount and new payment terms. Clients should be aware that you are serious about getting paid.

And last but not least – if a client refuses to pay a legitimate invoice, it is best practice to terminate services immediately. (I know it can be scary, but you don’t work for free!)

Easy Step 1: Send reminders and follow up on overdue invoices promptly.

8. Offer incentives for early payments.

Some freelancers and agency owners offer small discounts for payments made before the due date, such as 2% off if paid within ten days. It can be a good way to motivate clients to pay on-time.

If you decide to do this, make sure you clearly communicate these incentives in your invoices and contracts. Reiterate it in meetings and emails as well, since clients often don’t pay attention to invoice line items or the finer details of contracts.

Easy Step 1: Consider offering discounts to clients for early payment to improve cash flow.

9. Standardize your pricing packages with cash flow in mind.

As your freelance or agency operation matures, you will likely end up developing standard service packages. When you do that, keep your cash flow in mind. Consider the following:

  • Do I want to be paid in installments? Upfront? After delivery?
  • Would my services work best as a monthly retainer? Bundled services? Hourly rate, billed after the fact?
  • How many days can I expect between starting work and being paid, on average?
  • Am I generally making enough income?

Whatever your answer to questions may be, you want to make sure your pricing strategy is consistent with your cash flow needs.

Easy Step 1: Develop pricing packages that ensure consistent and predictable income.

10. Maintain positive client relationships.

Happy clients are more likely to pay on time and work with you on a recurring basis. Retaining clients is more profitable than acquiring new ones over the long run in nearly every industry.

Be sure to show appreciation to your clients from time to time. Small gestures of gratitude like thank you notes and even just having friendly conversation can go a long way toward maintaining good relationships.

Easy Step 1: Be nice to your clients. 🤣

11. Cut unnecessary expenses.

One tangible way to improve your cash flow quickly is to find places to cut costs. Even the most proactive business owners periodically end up signing up for a free trial of some software and forgetting to cancel.

Reducing unnecessary expenses is one of the fastest ways to increase your profit margins. In fact, because of the way taxes work, every dollar you save is worth more than a dollar you earn. Depending on your financial situation, saving $100 per month could be equivalent to making $125 or $150.

Easy Step 1: Read our guide on how freelancers and agency owners can save money.

12. Use business credit wisely.

Credit cards often offer reward programs, such as providing cash back on purchases. Businesses are often eligible for credit just like regular individuals are. That means you can defer payments for a short period of time to ease out cash flow worries.

Just be careful with this. As with using personal credit cards, it’s easy and tempting to swipe a card and spend more than you mean to. Paying off a credit card every month and taking advantage of rewards is great! But racking up credit card debt that you can’t pay in a timely manner and paying out the nose in interest is not.

Easy Step 1: Consider getting a credit card for your business.

13. Plan for taxes.

Unlike with a day job, no one is going to set aside money for taxes for you. So if you only think about taxes every quarter or every year when you have to file them, you might get some much bigger bills than you expect.

My advice is simple. Get a good estimate of what your taxable income is going to be for the year. Calculate your tax burden, divide it by 50, and sock that money away in your savings account every week.

When it comes time to pay taxes, however often that may be for you, you can take it out of savings and it won’t feel as bad as paying it out of your checking account on an ad hoc basis.

Easy Step 1: Calculate your taxable income.

14. Regularly review your finances.

Financial management of any kind is not “set and forget.” You need to track your expenses and monitor your cash flow on a regular basis.

I recommend categorizing your transactions on a weekly basis and reading your financial statements on a monthly basis. If you have a model for predicting cash flow, check that on a monthly basis and see if it gave you an accurate estimate.

Taking the time to review your finances will help you spot problems before they become too big to fix. Don’t skip this process!

Easy Step 1: Schedule regular financial reviews to maintain control over cash flow.

Final Thoughts

You need to be able to manage cash flow effectively to run a successful business. This can be really intimidating, especially early in your business.

But if you follow the steps in this guide, you’ll at least have a framework to manage cash flow going forward. That way, as you gather more information about the ebbs and flows of your business, you can more reliably predict what will happen next.

Once you get the hang of cash flow management, you’ll be able to comfortably cover your expenses, forecast revenues, and invest in the continued growth of your business. And that’s how you thrive in the long run!

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