The downside of freelancing is that sometimes clients owe money. It’s important to note that this isn’t necessarily done on purpose. Sometimes companies have specific policies, people are traveling or someone in the accounting department literally forgot.
I once had a check come in a month late because a giant blizzard hit Boston and shut everything down the day my payment was supposed to get processed and sent to me. Sometimes I’m traveling and have limited access to internet and can’t send some information my clients may need to process the payment. Even federal holidays can get in the way of being paid on time. The point is, this stuff happens and it doesn’t necessarily mean people are trying to stiff you.
The problem in this occasions is you have bills to pay. It can be easy to fall into feast or famine when clients are bit late in paying you. Fortunately, there are things you can do to deal when clients owe money and you have bills to pay.
How to Deal With Your Finances When Clients Owe Money
Have a Buffer
The easiest way to deal with your finances when clients owe money is to have a buffer in your checking account. That means you always have some extra money left in the account in case a day comes when client payments aren’t coming through on time.
The way I like to describe it is that you make a new “zero balance.” For example, maybe $500 in the account is your new “$0” and you never go below that amount. Others choose to have a month or two worth of expenses as a buffer in their checking account.
In total transparency, I’m in the process of trying to build this buffer for myself as we speak. I’ve decided to build it over time instead of pulling money from my savings to have a checking account buffer in place. This was my personal choice, but it’s totally up to you how you decide to do this.
Have an Emergency Fund
Another way to deal with your finances when clients owe money is to have a hefty emergency fund. Unfortunately, 62% of Americans don’t have enough money in liquid savings to cover unexpected expenses.
The reality is you should always have an emergency fund regardless of whether you get paid by multiple clients or have a regular job. Emergencies aren’t a matter of if, they are a matter of when, and you don’t want to get into the vicious cycle of slapping an unexpected expense (or a month’s worth of bills) on your credit card.
Financial experts claim you should have three to six months worth of expenses in an emergency savings account. As a freelancer, I challenge you to have even more saved to account for those months when clients owe you money.
Follow Up
One of the reasons freelancers have cash flow problems is because they don’t stay on top of people who owe money. That means there’s a ton of money sitting on the table that freelancers aren’t following up on.
I recently had a conversation with my accountant where he said many business owners don’t even know how much they made in a given year until December rolls around. As a freelancer with bills to pay, you literally can’t afford to do this.
Instead, take a look at the finances once a month and pay special attention to which clients owes money. Then do your due diligence in following up. Invoicing services like Due can help you streamline this process and stay on top of it all in a way that’s easy to manage.
Final Thoughts
There will be instances in your freelance career when clients owe money, which is why it’s important to have a buffer, have emergency savings and stay on top of these clients through follow ups. By using these three strategies, you’ll still be able to pay your bills even when clients owe you money.
