#092: How to Manage Your Cash Flow Like a Pro When You Have a Variable Income

As freelancers we don’t have the luxury of a fixed paycheck.

Even when you’re booking work like crazy, your cash flow is going to be irregular.

Sometimes unpredictable.

This is an issue that financial experts and money-management books rarely address. They’re geared to helping people with steady paychecks—NOT self-employed professionals.

In this episode you’ll hear from my friend and colleague Dianna Huff. Dianna has been trying to solve this cash flow dilemma for years. And she’s come up with some very specific and realistic strategies for those of us who earn a variable income.

This is part one of a two-part series on the topic of money—something we haven’t addressed enough in this podcast until now.

Look for part two on January 7th.

The notes that follow are a very basic, unedited summary of the show. There’s a lot more detail in the audio version. You can listen to the show using the audio player below. Or you can subscribe in iTunes to get this show delivered straight to the Podcasts app on your smart phone, tablet or iPod.

Tell us about your business

Dianna Huff is a marketing consultant who started freelancing in 1998. In 2014, she shifted her focus from copywriting to marketing consulting and website overhauls. She specializes in working with small, family-owned manufacturers and industrial companies.

What’s your take on managing cash flow as a freelancer?

A few years ago, Dianna started to question commonly dispensed advice from personal finance experts, especially when it came to retirement and savings. It didn’t make sense to her to work like a dog in preparation for retirement—especially when she’s healthy and enjoys her work.

She started researching the topic and eventually realized that most retirement advice is geared to people who work at the same company for 20 to 30 years and then retire with a pension.

Most personal financial advice doesn’t work for freelancers because their income is highly variable.

So Dianna ditched all the financial books and started figuring things out for herself.

What common financial advice does NOT apply to independent professionals?

Myth #1: Save 10 percent of your income 

Yes, you should save money. But if you have a variable income, saving 10 percent every month can be very hard.

Also, how do you calculate that 10 percent? Is it before or after taxes? Is it from your personal income or business income?

We’re also told to have this 10 percent automatically deposited into our savings accounts. That works if you have a steady paycheck. But what if your client pays late? The project gets cancelled? Or you have expenses to pay?

Myth #2: Put your retirement money into a retirement account for tax savings

That’s fine until your income dips, and you need temporary access to that money. You’ll take a big tax hit to take it out. When your income varies, you need more flexibility than a retirement account can give you.

Myth #3: Put aside three months of savings as an emergency fund

As a freelancer, you need to be more precise. Figure out how much you’ll need to weather clients paying late (or not at all), projects getting cancelled, etc. You have to calculate this number for yourself.

What strategies do you recommend instead?


1. Analyze your cash flow

Cash flow is critical for freelancers. Look at when projects come in, how long they take to complete and when you get paid. You not enough to just look at an income statement.

2. Work more efficiently

When you work more efficiently, you have time to take on other projects, which helps you boost your income.

3. Reconsider your billing terms

For her website overhaul projects, Dianna used to bill 50 percent up front and then 50 percent when the site went live. But that left her waiting for site design and other factors. Now, she charges 50 percent up front and 50 percent when she delivers the content, so she gets paid much sooner.

If you’re waiting 60, 90 or 120 days to get paid, you’re essentially financing the client.

4. Determine your breakeven number

Your breakeven number is the combined total of your personal and business expenses. Many of us know one of those numbers but not both. By calculating them, you’ll identify exactly where your money is going.

Also, when you know your breakeven number, you know precisely how much money you need to bring in every month.

As a freelancer, knowing your breakeven # helps focus your work efforts, without inducing panic.

Basically, you have to pay attention to three numbers:

  1. Your break even number (personal and business expenses combined)
  2. Your monthly cash income (cash coming in the door)
  3. Your sales goal number.

Often, tracking these numbers with paper and pen is best. Keep it low tech.

What do you include in personal expenses?

Personal expenses include your mortgage, other bills, groceries, clothes, vacation, fun and savings.

But be careful with “savings.” Unexpected expenses, such as home repairs, pet bills, and car repairs, can drive you into debt. Instead of having one savings pool, set up multiple funds, such as a house fund and car fund. Add to these funds little by little every month. When big expenses occur, you have the cash to cover them without using your credit card.

Annualize other big planned expenses, such as life insurance and taxes. These become part of your breakeven number.

Dianna likes You Need a Budget software for budgeting.

What are your thoughts on credit cards?

Credit cards make it easy to get into debt. If you’re good with paying off your balances every month, then use them. But if you’re not, limit their use. And if you have to use them, pay the balance right away.

Tell us more about your book

Dianna’s new book is Cash Flow for Freelancers. It’s a practical guide that helps you set realistic income goals, figure out where your money is going and build a financial cushion over time.

Where can listeners learn more about you?

Dianna Huff’s website: Huff Industrial Marketing

Twitter: @diannahuff