A comment from Michael on my Going Freelance: First Impressions post raised a great (and common) question, and one that I reckon most freelancers ask themselves when starting out: what if somebody doesn't pay, or pays late?
Your business, like any other (and even if you are a freelancer without an official limited company) takes money in in return for work, and spends money out in expenses, wages and so on. The money that comes in is based on the work you have completed, but more often than not there is a delay between finishing the work and being paid for it.
If the money isn't in the business to pay expenses and wages, you may find yourself out of business - even if you have taken on as much work as you could handle. You can be profitable on paper, but out of cash and out of business, just because cash wasn't coming in quickly enough. Having enough cash to pay your bills is referred to as being "liquid".
Well done! Convincing somebody that you are the right person to take on a paid job is the first step on the road to successful freelancing. Now, what does that mean in terms of cash flow?
Most people will look at a project, and will base their forecasts on something like this. We'll assume this job is estimated to take one month - a good sized job, and starts on January 1st. The job finishes on time on February 1st, and the invoice is sent immediately. The client pays in good time, and the money is received on March 1st. Based on this, a freelancer just starting out will only need to cope for two months with no income - achievable with minimal savings.
This would be lovely, but it's often not how things work in practice. Let's look at how cash flow can go wrong. To begin with, we'll assume this project runs long for some reason - although the bulk of the work was complete in one month, the client finishes their copy after two months, and once the copy is in they request a few changes. The job is eventually signed off in mid-March. With 30 day terms, the invoice is due in mid-April. And the client pays late - initially because they didn't receive the invoice, and then because they were just slow to pay. After a few weeks of chasing, money arrives in late May.
Four, nearly five, months, from the project being agreed to money being received. That means, assuming this was your first gig, and you had two months of income saved up at the start, you'd be looking at surviving over two extra months with no income. For most people, surviving with no income isn't an option. So you're left with two choices - take out a loan, or give up and take a salary at a company. Neither is a great start to your freelancing career!
I've been asked several times how many invoices are paid late, or how many clients pay late. Unfortunately, there's no right answer. Some people go for years with no late payments. Some have a particularly bad period where everybody pays late.
In my experience so far, around:
My latest payment was three months overdue when paid. The fastest payment was under an hour.
There are three ways (other than reducing your business expenses) to keeping your cash flow from being a problem: