Cash flow tips for freelancers

If you are a freelancer writer (or any other kind of freelancer for that matter) summer can wreak havoc with your cash flow. The people who draw up contracts are on holiday. Accounting has someone filling in, and they are slow. Work dries up. You go on holiday, meaning you are working fewer billable hours.

Meanwhile, your bills keep rolling in, same as always.

A few years back, Canadian Screenwriter ran a story I did on cash flow for screenwriters -- but really, it applies to pretty much any freelance writers or artists.

And if you're a freelancer and want to share your own tips, hit the comments link below.

Go With the Flow
By Philip Moscovitch

If you're anything like me, you wind up tuning out all that standard financial advice in the media. Why? Because, most of it doesn't work for people with fluctuating incomes and lots of job insecurity. People like screenwriters.

Amanda Mills, who bills herself as a “financial therapist,” says the most volatile incomes belong to screenwriters and sculptors. But don’t throw up your hands. Despite the unpredictability, you can plan and avoid cash flow woes.

Put it aside
Mills, who works primarily with artists and writers, says a realistic view of your income is key. We tend to take our best months or years as our benchmark. Instead, Mills says, take the low end of the curve and base your budget on that. “When the upswings come you can expand your budget a bit. If you’ve allowed yourself so much for entertainment, add to that. But also make sure you use some of the money to build a six-month cushion”—a nest egg that you can live on if you’re out of work.

Brian Bowes, who offers financial planning and tax services for writers and artists, says you have to make sure to put enough money aside not only for lean times, but for the taxman too. “You have to master setting money aside—people in the first year especially, because they forget about income tax. Suddenly you get a bill for $10,000. Not only have you not saved anything, you owe all this money.”

It works best if you put money for taxes and a rainy day fund aside in a separate bank account, preferably one that will pay you a bit of interest. As for the amount to save, Bowes says it depends on many factors, including your income. But he offers 30 percent as a good general target. “If you’re the kind of person who has good times and then lean times I would think 30 percent is not a crazy number. The worst that happens is you’ve got extra money.”

Spend smart
Saving is one way to ensure decent cash flow. Another is to become smarter about spending. Barbara Florio Graham, who has been a freelance writer for 36 years, says you need to plan your spending, because “you don’t have time to shop when you’re working, and you don’t have time to work when you’re shopping.”

Her planning includes buying office supplies in bulk in August and September, and computers and other office equipment after Christmas, when they’re always cheaper.

She also tracks her spending by putting it all on two credit cards that offer rewards, and paying off the balance at the end of each month. Mills says that’s a great approach for people who “have a hard time getting receipts but are good at paying off the credit card bills. But it’s not good if you’re not the type who pays your balance off.”

Graham says that keeping an eye on spending doesn’t mean deprivation. Instead, skip the frivolous expenses and treat yourself once in awhile. “My philosophy is getting the biggest bang for my buck,” she says. “If I go out for dinner, I really enjoy myself.”

Bowes suggests flexibility as a way through the down times. Don’t buy a car if you don’t have to. You avoid monthly car payments—one less thing to worry about when money isn’t coming in.

Bridging the gap
No matter what you do, there may be times when you’re just short of funds. A line of credit can help—especially now, with interest rates so low.

“If you’re working on something and you don’t get your production fee for four months, certainly a line of credit can sustain you,” Bowes says. I would suggest that you consolidate at four or six percent instead of carrying credit card debt at 18 percent.”

But Ellen Roseman, personal finance columnist for the Toronto Star, points out that lines of credit have their downside too. If you find yourself just making the minimum payment, you’re only covering the interest and never paying down the principal. She says, “You have to watch that, or it’s a loan for life.”

Many banks offer lines of credit secured against your house. Technically, Roseman says, that’s a second mortgage. “Don’t leverage your house to the hilt,” she says. “It’s very easy to do because lines of credit are so cheap… but it means you’re really vulnerable if rates go up or market value goes down.”

One way to get through the tough times is to draw money out of your RRSP (because you maxed out your contributions during the good times, didn’t’ you?). Both Bowes and Roseman note that by maximizing RRSP contributions, you get a great tax break during the good times, and then when you withdraw the money during the bad times, you’re taxed on it in a far lower bracket.

But Mills is skeptical of the strategy. She says what often happens is that writers “are in clover the first half of the year, and then they’re cashing in their RRSPs in the second half of the year when work is slow.” Because you earned good money for part of the year, you’ll face tax hit on that RRSP withdrawal. “It makes me sick when that happens,” she says.