Cashflow for contractors

Date: 25 October 2009

Why cash is king for contractors.

 Many contractors and freelancers think of themselves as self-employed individuals. However, if you have a limited company it’s vital that you view yourself as a business and act accordingly. In this capacity you need to consider how much profit you’re going to make in the coming year and what your operating costs will be. 

As important, as any savvy business owner knows, is cashflow; it’s no good if you’re doing well for most part but run out of cash before the end of the year. With this in mind here are a few cash flow tips for contractors:

You need to keep a careful track of what’s going in and out of your business.  You should be aware of when you’re going to be paid and when you’ll need to make key payments. For example, some contractors run into trouble when they take too much out of the business and don’t have enough to pay their tax liabilities for the year. 

Ensure you’re get the timing of key payments right.  Planning for payments to HMRC for VAT or Corporation Tax, for example, will ensure that there are no nasty surprises when it comes time to pay and you don’t incur penalties for late payment.  Plan accordingly.

Establish a good rapport with your client’s Accounts Payable department.  Especially with larger organisations it’s important to have someone to turn to if your invoices haven’t been paid. They should be able to help expedite payment and you should be diligent in following up on outstanding invoices.

Understand your client’s payment practices. This follows on from the point above but get to know how your client makes payments – When do they make payment runs? Who authorises payments? What happens if they’re away? Etc.

Build a positive relationship with your bank manager. As with any business there may come a time when you need to ask for a loan or financing. An established relationship and track record will help.

Ensure your invoices are clear. Keep your invoices simple and clearly laid out.  Provide thorough descriptions of your charges and ensure your payment terms are clearly laid out on the invoice. Confirm these terms with your client up-front.

Separate your fees from reimbursed expenses. Clearly distinguish between your fees and reimbursement of expenses. Indeed, think about invoicing for the latter differently; you don’t want a quibble about your expenses hold up the larger payment of your fees.

Carefully consider your expenditure. When times are good and you’re charging a hefty day rate you may feel entitled to splash out. But, things can quickly change.  You need to build up reserves in the event of a gap between contracts or a reduction in your rates.

Think about your future earnings. When you near the end of your contract you need to think about next steps and make a plan. Don’t leave it to the end of your contract to begin planning. Particularly think about your cashflow for any gaps between contracts.

Critically evaluate your financial drawings from the business. Think about leaving as much cash in the business as you can. Not only will this help your cashflow but will also reduce your tax burden.

Hopefully this has given you a good insight into why it’s important to behave like a business and to manage your cashflow. An ongoing cash surplus means that you earn more interest on your money and you avoid any penalties or surcharges for late payments (due to insufficient funds). It also means that you always have sufficient funds to cover your outgoings, you’re able build credibility with your bank and show yourself to be creditworthy.