Freelancing questions: what to do when the cash flow runs cold

Cash flow: two words that can cause the blood of even the most hardened freelancer to run cold. According to various interviews and surveys that we’ve done in the 12 months since we launched The Life Hub, cash flow is the thing that worries independent contractors and similarly self-employed people more than anything else. It keeps them up at night. They have nightmares about it running dry before they’ve saved enough to survive. It is the one constant among freelancers the world over. 
My Accountant Friend online accountants

Of course, having a decent accountant can be considered the first line of defence against anything untoward happening. Not that they’ll earn money for you, of course, but they can keep you on the straight and narrow should you start wandering into the arena of the financially unwell. Kenny Fitzgerald, our go-to man at My Accountant Friend, says it’s what an accountant is there for, although he’s quick (and wise) to point out that advice is all he can give. “At the end of the day,” he says, “if our clients choose not to listen to us, they are the ones left holding the unpaid tax bills.”

Kenny has been with My Accountant Friend for some time, working with freelancers and independent contractors. He helps newcomers set up their businesses, register with Companies House, decide whether to be a sole trader or a limited company, and get started with the My Accountant Friend software, on which they can see exactly how financially stable their business is at the touch of a button.

Cash flow, stock and dividends

Appealing to Kenny’s wealth of experience, we wonder what cash flow problems he has seen most often. “There are a few,” he explains. “The first is the most obvious, and that is simply that the business owner tries to draw more cash than is available – although that isn’t too much of a problem with the My Accountant Friend software, because the amount that is available to you is clearly visible every time you log in. The second most common problem is that the company purchases too much stock on slow-moving lines, although this isn’t going to cause most freelancers or independent contractors too many problems, as they rarely have stock to sell.”

As Kenny says, clients using the My Accountant Friend software can always see the cash reserves available to them in their dashboard, with the tax already subtracted (the program links with your business bank account to ensure that everything remains accurate). This means that drawing too much in dividends shouldn’t cause difficulties. “We advise on making use of dividends as they don’t attract National Insurance Contributions,” says Kenny. “As such, they are more tax efficient than receiving a salary from the company. If you’re not careful (or you’re not using decent software), the amount of dividends drawn could exceed the reserves available. You don’t want to end up with insufficient funds to cover the tax you owe.”

Avoiding bad debt situations

Similarly damming to your cash flow potential is ‘bad debt’. In the world of freelance and independent contracting, this is when the people you work won’t (or can’t) pay up. Many find themselves having to take on bad debt simply because they’re not sure how to deal with it.

Kenny’s advice here is simple. “Credit check your clients before you start a new contract,” he says. “If the agency or client that you’re working for is a new startup, or is perhaps going through a bad patch, they themselves may have cash flow issues and that’s obviously going to have a knock-on effect. Now, if they don’t pay up, there will be clauses in your contract (you have a contract, right?) regarding outstanding fees, and you can start the process of legal action via the small claims courts, if required. However, I would recommend speaking to an expert in this area, as many of these claims needn’t go as far as court.”

Time to fold?

So far we’ve looked at preventative measures you might take to avoid cash flow difficulties, but what happens when the flow turns from cold to solid ice? What if the business has simply stopped earning money, there’s barely enough left to cover any taxes owed, and yet you still need to pay the bills and keep some food on your plate? What options do you have available to you then?

Naturally, Kenny is quick to warn his clients when things begin to look dire, however an accountant can’t be held responsible for the fundamental success of a business. “In the worst case scenario, if no profits are being made,” he says, “you may have to start looking into liquidating your company (making employees redundant and effectively selling it for parts). However, you’d certainly have to stop drawing funds from the company, or else you will most likely end up even worse off, as you’d have to repay whatever you’d overdrawn.”

As Benjamin Franklin once said, “in this world nothing can be said to be certain, except death and taxes.” With a decent accountant onboard, at least you’ll be better prepared for the latter.

Worried about cash flow and keen to know what a friendly accountant would advise? Get in touch with My Accountant Friend – the online accountancy company with a human touch.