Pillar #5: Improve Your Cash Flow Management

cash flow management

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Freelancers Joe D'Agnese and Denise Kiernan, authors of the fantastic book The Money Book for Freelancers, say that "Money isn't the biggest reason people become freelancers... but money is the BIGGEST reason most of them end up quitting."

How true! Your intentions for being self-employed could be right on target. And you could be the best freelancer in your profession. But if you can't manage your finances properly, you'll quickly find yourself taking desperate measures.

Like taking on the wrong client or project. Or undercharging for your work. Or pursuing prospects you know are a horrible fit for you...

All because you need cash to pay the bills at the end of the month.

Just like a traditional business must employ sound financial management practices, freelancers must learn how to manage their money really well.

Why? For one, our income is erratic. We may have a killer month, followed by a month with no billings, followed by a so-so month. It's the nature of contract work.

Second, cash flow is often difficult to predict. You may have invoiced $7,000 this month. But that doesn't mean you'll get $7,000 in the door in a few weeks. One client may have lost your invoice. Another one is paying you in installments. And the one client who did pay on time was the one with the smallest invoice (never fails, does it?!).

Finally, as freelancers, we don't enjoy cushy benefits like employees do. Things like regular paydays, paid vacation time, paid sick time, affordable health insurance and employer matching on the retirement account.

If we take time off, that usually means we don't have billings for that time (just one of many reasons to develop passive income streams... but that's a topic for another lesson!).

Same thing if we get sick. Or if our health insurance company suddenly slaps us with a 20 percent increase in our premiums (not very common when you're an employee, but a real possibility when you have an individual policy).

Bottom line: You need to have a simple financial plan in place that addresses key financial areas of your life and business. Specifically, your plan needs to encompass the following:

  • Savings
  • Insurance
  • Retirement

Let's address each of these in a bit more detail.


Money in the bank is the best sleep aid you can buy! A properly funded savings account provides you with a solid foundation on which your business can grow and thrive.

Specifically, you need a certain amount of money to maintain your freelance business through the inevitable ups and downs. You also need enough savings to cover emergencies and other unexpected expenses.

Before we get into actual figures, let's talk about what kind of savings you need. Doing so will help you better determine the amount appropriate for you. Rather than coming up with an arbitrary figure, take the recommendation of Veronica Dostal, an accredited financial counselor and financial coach who regularly works with the self-employed. She suggests that you think along the lines of three different savings buckets and work backward.

For instance, the most obvious type of savings you'll need is the true emergency fund. These savings are intended to cover things such as medical emergencies, unplanned (and expensive) home repairs or the occasional $1,500 auto repair bill.

New freelancers also need reserves to cover income shortfalls that arise during the first year or two in business, before the work is steady and predictable. But even established freelancers should set aside some funds to cover slower months.

Finally, you need to save for expenses that are more predictable but still outside your regular budget. Things such as property taxes, back-to-school clothing for the kids and preventative maintenance for your car. These aren't true emergencies, but they are expenses that may be difficult to fund from your monthly cash flow, so you should create a cyclical set-aside to fund them.

All these savings buckets can go into one main savings account. But track the amounts in each bucket so you know what you have set aside in each and can better determine which one, if any, may need additional funding as your situation changes.

Once you have your savings buckets set up, you can start thinking about how much you actually need in each. Most financial advisers suggest keeping three to six months of total living expenses in your emergency fund. However, because your income as a freelancer can vary month to month, especially when you're getting started, I strongly suggest you shoot for at least six months of living expenses, which you can split between your emergency fund and your income-shortfall reserves.

If this sounds overwhelming, don't panic! You don't have to save this now. Build up to it. Designate a certain percentage you'll save every month from all your billings, even if it's as small as 3-5 percent at first. This allows you to fund that account over time and without the stress of making large lump-sum contributions.

A Painless Cash Flow System

For many years, I struggled with how to save for all the different needs that come up during the year. I never really had a reliable way to determine how much to put away, where to keep those funds and how to manage the whole process.

That's until I picked up The Money Book for Freelancers by Joe D'Agnese and Denise Kiernan. In this very practical and easy-to-read book, Joe and Denise show you a brilliant cash flow system that could only have been engineered by someone who's in the freelancer trenches every day. It's simple and easy to implement, regardless of your current financial knowledge or your comfort level with math.

It also doesn't matter how little or how much you're earning as a solo professional. The authors' system will easily scale up or down. It's also very flexible. So it doesn't matter if you spend a big part of the year traveling the world on different assignments, if you're more of a traditional work-from-home freelancer or if you're moonlighting while you keep your day job.

Best of all, it works! I've already implemented a few of their ideas and am getting great results, which is very motivating!


If money were no object, you could conceivably insure yourself against just about any calamity. But as a freelancer, you want to drastically reduce the risk of financial ruin, not necessarily eliminate all risks you may face. With that in mind, here are the four types of insurance policies you'll want to consider:

  • Health
  • Long-term disability
  • Life
  • Professional liability

Health insurance. Regardless of your age or current state of health, you're putting yourself and your family at great risk if you don't have health insurance (unless, of course, you already have government-provided health coverage in your country). With today's high medical costs, just one trip to the hospital can wipe you out financially.

health insurance

In many cases, individual coverage costs more (both in terms of monthly premiums and out-of-pocket costs) than does comparable coverage through an employer. But what many freelancers fail to realize is that the objective is not necessarily to obtain the same level of coverage you may have had as an employee. The objective is to get access to quality care - even if you have to pay slightly higher premiums than you were paying as an employee - while also covering your risk of catastrophic medical events.

So don't forgo health insurance just because you don't think you can afford it. Or because you've been turned down before. Contact an insurance broker and leverage his or her expertise. Good brokers know how to find the best options for your specific situation. Plus, you usually won't pay any more to work with a broker than you would by going directly to the insurance company (brokers are paid a commission by the insurance company, which means that their advice is free!).

Long-term disability insurance. Long-term disability (LTD) insurance is designed to replace a portion of your income should you not be able to work because of a disability. Statistically, your chance of sustaining a serious injury in your 30s or 40s is much higher than your chance of dying. Yet surprisingly, 60 percent of working adults in the United States do not have disability insurance, according to the Health Insurance Association of America.

Your ability to generate an income is one of your most important assets, especially if you're the sole breadwinner or even a contributor to your family's total income. You need to protect that asset, and that's what LTD insurance is designed to do. Let me warn you, though: LTD insurance is not cheap. But considering the risks of not having a policy, the expense is often justifiable. Talk to your broker about the best options for your specific situation. And be sure to shop around.

Life insurance. The final type of policy you may want to consider is life insurance, which is designed to help replace lost income in the event of your premature death.

Now if you're single and have few obligations, you may not need life insurance. But if you have a spouse and children who depend on your income, life insurance is a lot more important, unless you're already financially independent and your assets could support your family in the event you were no longer in the picture.

Here again, get in touch with a good insurance broker or agent and review the best options for your situation.

Professional liability insurance. Also called 'errors and omissions insurance,' professional liability insurance coverage protects you from allegations of poor decisions or bad advice.

Now before you panic, you should know that most freelancers will not need such coverage. Not only is it overkill in many cases, it's also very expensive. Plus, the exact definition of 'wrongful act' (the event that would trigger coverage) varies from policy to policy, so you need to be careful about what's excluded from coverage and how much the policy will pay out in the event of a lawsuit. You could end up paying for something that doesn't cover your biggest risks.

Consult with an attorney who knows your business well or who at least works with many self-employed professionals in fields similar to yours. Find out what the risks are and what type of policy (if any) would make sense for you. If you determine it's worth buying some degree of coverage, have your attorney review the quotes you receive and help you make the best decision.


These days, a growing number of workers are opting to work beyond age 65. Some are doing this because they want to. Others do it out of sheer necessity.

At the same time, many people are now challenging the whole idea of retirement. They're exploring other alternatives that are better aligned with their goals and values. For instance, in his best-selling book, The 4-Hour Workweek, Tim Ferriss introduced the concept of 'mini-retirements' the idea that instead of saving it all for the end, we should redistribute our retirement savings throughout our lives and use them to take mini-retirements of one to six months every year.

I actually like that concept. However, it's important to stash away some cash to fund that "modified retirement" model. Plus, at a minimum, a sizable retirement savings account buys you freedom and flexibility. Especially later in life, when you may not have the patience or desire to put up with other people's crap!

Again, you may not have gotten into this business for the money... but you don't want to have to end up getting a J.O.B. because you couldn't make the finances work.

Especially when a simple system can get you back on track so quickly.

Start by putting away a predetermined percentage of all your monthly billings into a savings account, even if the percentage is small at first. Make the transfer online at the end of every month. And watch your savings grow... and your peace of mind improve!

Keep on rockin'...

Ed Gandia
Co-founder, International Freelancers Academy


Did you get here via a link from a friend or through Twitter? This lesson is part five of a seven-part free mini-course on building a rock-solid freelance business. You can learn more about it and sign up here.