I’ve got a novel and mostly unpleasant experience as a freelancer: I’ve easily made six figures, and I’ve rarely had more than $2,000 in the bank. The reason was that I’ve only recently been able to loosen the teeth of the hydra (in the form of unshakable IRS debt) from my trachea. I’m still licking my wounds and I still have some bad habits from having that monster bear down on me.
The monster isn’t quite vanquished, but I’m now the hunter not the hunted. I’ll be 100% clear of the IRS’s vile fangs shortly. And I’ll never look back.
Greg Swann had a great phrase, “surfing the payables,” and that was the MO of my life for the last 2-3 years. I was always behind and always paying people in the order that they would tolerate it. I let out slack in the form of TIME as a way to manage things.
When’s the bill due? When the 2nd shut off notice comes. That’s the way that I had to roll to pay debt, and I’ve got no regrets. It’s what it is, and I’ve survived, taken my blows and delivered them.
Napoleon says, “Space we can recover. Time, never.” Space = cash in the world of the self employed. When you run out of days, that’s when things get bad. You can make more money to punch through easily enough. You can’t make more time. So building a buffer between yourself and the bad stuff happening is essential.
Do it first in your personal life (as I have) and next in your business (as I will).
I’ve gone to partially prepaying my subcontractors for the work that they do. Until really recently, I’d been good about it and brought the bubble current. Recently, however, I’ve let some slack out there. I got rid of all of my “cash cushion,” in late December because the State of Ohio was pretty serious about getting a payment in (I blew off the state utterly as I was paying the Feds). I paid Ohio on 1/4.
My business then is probably running 20ish days behind the due dates of everything. I want to create a big time cushion in the business, and I want to do it in 15 days. I want to have enough money to be the classy guy I know I can be. Or at least pay my bills on time.
I don’t want to perpetually operate in arrears. I want a good bit of distance between me and my bills. I don’t want to negotiate with creditors. And the IRS to some degree built the skill at doing that and the “everything’s gonna be ok” mindset about it. But the thing is, everything is NOT OK. It’s NOT OK to be a minute late with bills. That’s not a business, that’s some type of bad joke.
Six figures, great revenue, and 30 days behind. It’s a habit and a lifestyle and a choice. And it’s easily fixed. Knowing how long people can wait to be paid is stupid. Paying people when the work is done, on some intelligent schedule is the way to go.
I’m going to flip this around in 15 days, being strategic in lieu of being merely tactical and reactionary. I’m going to tell you how, here, and I’ll update y’all on my Posterous as well.
My bookkeeping–as Johnny pointed out–is a joke. That changes now. I hate QuickBooks, but who cares, right?
So here are the steps:
#1: Put yourself on a salary.
That’s for the “personal” side of things. Being on a salary is the way to go. You are on a salary so you can be credible, pay bills and do the right thing. Cut your personals to the bare bones, and then have a salary. Calculate withholdings–as if you were a working stiff. I pay myself $52,000 a year. After withholdings, that’s $817/week. Been doing that for a little while now. This was courtesy of International Tax Problem Lawyer Phil Hodgen.
#2: Pick a day to be exactly even.
I need to do this by say, 2/15. That’s 18 days out from today, and I should be able to do it. This can be renegotiated later, but keep it within 30 days. Everything is cash now. There is no tooth fairy coming to pay your credit cards.
#3: List Your Payables, Including salary & Known Recurring Payables till the cutoff date:
For me, mine is $7469. That includes 2 weeks salary, EVERY bill that’s due or will be due. Remember: I know that I pay for Aweber and other stuff monthly. This lists it. I’ll be ahead of everything and my business will be brought from -20 days to even.
Think:
- Rent
- Business
- Advertising
- Subcontractors
- Monthly fees
- etc.
You get the gist and understand your business better than I do, but ADD IT UP. I did mine on a yellow pad.
#4: Figure out how much cash/how many sales you have to generate to close the gap, in profit, not cash, with taxes paid.
That’s the kicker. If you just borrow from your tax account you’re not solving the problem. You’re pushing the problem around. So let’s do this:
First, my PayPal merch. account rakes 30% from me as a “rolling reserve.” That’s to protect Paypal against my own default. It’s higher than most in part because of my tax liens, nature of business, etc. It’s fine with me, really because I essentially use that reserve as a tax account. The money comes out 90 days after it goes in. So this handles “taxes” from my perspective.
Next, I have sub contractors to pay. I pay $272/blog to merch. services, subs and Thesis licenses. Other products vary…but we get the gist. So then, each $797 blog I sell gives me $797 – (less .30 = 239.1) – (272) = $285.90. This is an after-tax margin of ~36%. Most of my products fit this bill/model, and I’m good with it.
If I sell it. If Ian sells it, it’s worse for me since he gets a cut. Again, if Ian sells, I basically get more money to pay taxes in 90 days plus $50 bucks now pus some recurring revenue. Not sweating that. Bottom line though is this:
To close my gap and get to zero days behind, I need to earn then $7469/.36. This means that I have to earn $20,747, in gross revenue in 2 weeks. I will earn it. (Tracking on my Posterous)
#5: Pay current all incoming jobs (LIFO):
This sucks for me, and it takes discipline. But every sale I take, I prepay my subs. I’ve gotta do this now. I don’t set the money aside, I prepay. Why? Because it makes my business run more honestly. I’m paying from profits and catching up in lieu of paying from future revenues. My people then don’t have to worry about getting paid. I don’t have to worry about a freelancer bill. This is something that is the hardest of my standards to uphold when I hear the hoof-beats of big bad scary bills. But, if I’m only payinfg for the past with money I’ve earned in the present, I’m going to have a real picture of recovery. It’s not going to be an accident.
#6. Prioritize where your money will go.
So in step 3 you added your receivables up. Now, it’s time to prioritize it all. List what you owe, and then 1, 2, 3, 4, 5 it for order. Then do it. Anything else that “comes up” needs to be taken into account. EVERY BILL I KNOW ABOUT is listed and put into an order that makes sense. If you’ve got new, planned spending, include the planned spending in order. Get it?
Stick to it, wait till you see the whites of their eyes. Don’t let new spending change your priorities. And, keep your cash the SAME it is today. Meaning: whatever cash on hand is your new cushion/life and death fund.
Make it right: don’t put the largest bill first (you can put $500 towards the largest bill).
Write it down. Post it on your wall, and go top to bottom. When you earn money (and you will earn money), knock out a debt, in the order you can.
Go on over to Posterous and follow me. I’ll get out, you’ll watch and be inspired.
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