Cash Flow Problem


I’m having a very annoying and ongoing cash flow problem.

My main business expense is my own salary, and I pay rent and most of my bills personally, out of my salary. No problem there.

I also have pretty regular and ongoing work, and most months the work covers my business expenses comfortably or with small profit. That’s fine too.

The problem I’m having is, even though my work is regular, and I bill regularly toward the end of the month (around the 25th or so), it of course takes time for my clients to cut me their cheques. They all pay quickly; most times in about two or three weeks. But because I have no business savings, I keep having to use my credit card as a buffer to make up funds quickly to take my salary. Therefore when I eventually get paid by my clients, it’s the middle of the following month, and the money goes straight back into paying off the credit card and not into business savings.

It’s a cycle that started a couple months ago, when my business savings were used up dealing with two computer crises that came on top each other.

I’m nervous about not having savings (in case of emergencies), and I also dislike having to use my credit card that way, not to mention the desperate feeling toward the end of the month that goes with it.

Any advice on how to get myself out of this ongoing cycle? This is the fourth month it’s been happening.

I would seriously reconsider that statement - is it really fine that your revenue covers your expenses ‘most months’, or that you have a sometimes ‘small profit’? That is really not doing business, that is just surviving. You might as well get a job and at least enjoy the relative stability of that.

If you are going to do business, you need to have substantial profit margins, and a good cash cushion. If you don’t have that, look at your business model and try to figure out what you can do to change things. Just surviving with a ‘business’ is a painful, stressful, and difficult way to live as compared to getting a great job doing the same thing. Can you rethink your approach, and see what you can do differently?

I used an average of my living expenses over three months to set my salary, and an average of my work expenses over the same period to redo my rates. When I’m quoting on a job, I estimate based on those expenses (plus other things like hiring transport or renting lights for photography), then add an 80% mark-up and offer that as my fee.

So could it be that my mark-up is too modest, or am I just not busy enough? Or is that up to me to decide?

What other things do you think I might need to look at? (If that’s possible for you to tell without knowing more about the situation.)

I would recommend that you take a step back from the details and ask yourself a higher level question, ‘What is your long-term goal, career-wise?’. In other words, what you are trying to do?

If you are just trying to survive, then taking your actual expenses/needs and adding a percentage will put you in constant survival mode, which you are in now.

If you are trying be be a professional of some type, then ask yourself - would you be better off doing that for another organization (i.e. a job) or for yourself (i.e. a freelancer)? There are pros and cons to both, but if you just want to be a professional then go get a job. If you want to be that professional but also handle the hustle of getting business, billing, and taxes, etc. then maybe be a freelancer.

If you are trying to build a business then that is a totally different story. Doing ‘stuff for money’ without having a boss is really not a business, that’s just freelancing. A business is something that has a plan, a strategy, and should grow over time to be a self-supporting thing that is bigger in scope that just a single person doing ‘stuff for money’. If you want to build a business, your rates have little to do with your overall plan - you should have a clear business goal in mind and that goal should drive your decisions.

It sounds to me like you are in survival mode, especially if you are using credit to survive. Over time, that will probably sink you completely because the constant use of credit brings a lot of risk to someone who is already cash poor.

so, what is is that you would rather be doing in 3 years?

  • running a business
  • doing the professional service that you are doing now?

What you can charge, mainly depends on your target group and location.

However, this does not mean you should agree to work for little to nothing.

You mentioned a key point with “I used an average of my living expenses over three months to set my salary”, instead of using a salary you want to earn.

What you should do is, decide how much you want to earn per month (dont be too greedy in the start as that might mean you would lose all your customer base, but instead increase this over time), then calculate in the expenses you have with your business. And finally find out how many billable hours you have each month.

When you have the total expense cost per month (expenses + your salary) and the number of billable hours, you divide those to get the hourly rate.

This is a very simple way of calculating the hourly rate, so take it with a grain of salt. The idea is that you should figure out what your cost is, and set a hourly rate so that you can actually survive without scraping by.

Hi Shaun,

I have been in the same situation for years and am still to a certain degree. Sagewing’s advice is totally correct, but even though I’ve read it here, I had to figure it out myself that it is correct.

We all believe in our businesses, so we plan for the best case. Problem is it doesn’t happen. Usually its the other way around - **** happens!

The payment terms are not your problem, its profitability. Although I use very short payment terms, the benefit is more from establishing a peer relationship with someone bigger than the actual cash flow coming in earlier.

The other comment I’d like to make is one that my brother made to me many times. Why is your work regular, is it maybe that you also win all proposals that you make? Then you are just way too cheap. Imagine you would put your prices up 50%, how many of your customers would you loose? 10%? 25%, 30%? You’re still better off, probably you could loose 60% of your customers and by changing your sales tactics get back to being 66% of 100% busy. Still the same money!

As others have mentioned, right now you have a job, not a business, and worst of all you have a business that is losing money. Yes, you are making money, but if someone were to buy the business from you right now they would figure that they would have to pay you (or someone who can do your job) $xx,xxx per year. Once you take into account that salary, there would be no money left over.

It`s an inevitable predicament when first starting a business and most people here have probably found themselves in (I know I have!). So (again, as others have mentioned) you really have to forecast for the future and ask what you want from this all. If you want a business, you have to take into account what a fair salary is for you as well as all of your expenses (including staff), and then add a reasonable profit for the company above and beyond all of this (which you can either keep in the company or pay as a dividend). You have to plan at least 2 or 3 years down the road because it will take time to get there.

If you just want a job then you have to work harder and make sure you`re not simply living job to job (or month to month).

To tell you the truth, I would probably prefer providing the service I provide now. I love my work; It’s exciting.

I’d like to think I’m doing more than “stuff for money”, but sadly that might really be the case. And trust me, the reason I made this thread in the first place is because the constant jugging of credit is worrying me.

hmm… I hadn’t considered that. I don’t win everything, but I do get almost all. You’re right, that might be a sign that I should push the rates up some more.

I think I know what I want for myself personally; I want a house, a retirement account, and a savings account just for the purpose of travelling with my better half. Yes, yes, it’s what almost everyone else wants too.

For my work, I want to continue being “unattached”… I like being mixed up in lots of different projects, types of events, and meeting different types of people. But I also want projects stable and reliable enough that I can confidently plan my personal finances to achieve the personal goals I listed above.

There are two sides to my “stuff for money”; web-design and photography. I’m having a lot of fun doing photography, and three years from now I think I still would. I wouldn’t want to give that up (ie. by hiring it off to someone else). But truthfully, I’m getting tired of the web-design part, and wouldn’t mind taking on the roll there of planner and seller, and hiring others to do the graphics and programming. On that side, I think I like the idea of being the base of the food-chain; Producing work for others.

I guess I’m of two minds then. I should probably give everything some more thought.

Any thoughts on the immediate situation of getting out of the survival mode/credit cycle?

Actually, forget it.

I’ll have to do it by building up “a good cash cushion”, and I already know I’ll have to do that slowly and constantly each month. Okay, time to do some math!

Thanks for all the thoughts and advice, everyone!

The problem with math is that it’s unforgiving. Here is how your math will work out:

(sum of payment for stuff) < expenses of life * (risk of using credit)

Without reducing your expenses or increasing your income, things wont stay the same. They will get worse. The reason is that each time you dip into credit you are assuming risk of a snowball effect, and eventually you’ll get hit. So, saying that you are going to suddenly build a cash cushion without making some change isn’t much of a plan.

If your problem was that you brought in plenty of revenue each month, but had poor discipline and blew it all before months end, that would a problem you could fix, but that’s not what you said.

Also, in your reply you first says that you love doing your professional service most. My gut feeling is that your first reaction, your first statement, is the one that is probably true - you like DOING photography and (maybe also) web design more than anything else. You later added that you liked the freedom of being independent and that you ‘wouldn’t mind’ doing some of the business stuff required to run a business.

So, maybe that’s your answer: look for a stable/lucrative job doing what you enjoy and then just enjoy what you do. If you can’t find one, then learn how to be a FREELANCER (not to be confused with starting a business) in one of those things - photography or web design but not both. By focusing on what you most enjoy, you will probably be more successful.

Not immediate, perhaps, but join a Credit Union. They generally have significantly lower interest rates on loans than banks or credit cards.


Thanks for all the advice.

It is difficult to mange the if your expenses are greater then your income. Then there is not way to save for futures use. If you want to save some thing for future use, you need to reschedule your working time. You need to increase your working hours. So that your income increase and this extra earning lead you saving for future use