Most freelancers have fluctuating incomes, which often leads to financial distress. While some months are better than others, you may lose a client anytime. There is also the risk of incurring unexpected costs, such as medical emergencies or car repairs.
One way to avoid financial mishaps is to make sure your clients pay on time. This requires tracking your accounts receivable and sending payment reminders.
Accounts receivable is any amount of money owed to a company for goods or services provided but not yet paid for. Simply put, it's a current asset account with an unpaid balance.
For example, if you deliver a project on March 1 and expect payment by March 31, you must create a journal entry for accounts receivable. When the client pays off the invoice, you'll debit your cash account.
As a freelancer, it's essential to keep track of your accounts receivable and manage it effectively. This will not only help you stay afloat in tough times but also drive business growth. Here are some tips to help you out!
For starters, make sure you understand the impact of accounts receivable on your cash flow.
This account keeps track of the money owed to your business by clients. When used right, it can make it easier to manage your finances. It also ensures that you have the funds needed to run your business smoothly and pay suppliers, contractors, and other third parties on time.
Any changes in accounts receivable will reflect in your company's cash flow.
If your clients don't pay what's due, you'll record the transaction as a bad debt expense. However, you should first contact the customer in question or reach out to a collection agency.
The bottom line is, having a steady flow of income is great. But if your clients fail to pay on time or don't pay at all, your business may suffer.
Now let's take a look at the best ways to manage your accounts receivable as a freelancer and how to make your clients pay faster.
Most freelancers who sell goods or services online invoice their clients by email.
But what if you operate a brick-and-mortar business, such as a retail store or consulting firm?
In this case, you could set up a website and list your products or services online. Encourage your customers to place their orders online or pay up front online before coming to your office.
For example, if you run a consulting firm, consider setting up a small business website and social media pages. Make it easy for customers to contact you online and ask for a quote. Send them an invoice by email and then invite them to your office.
Here are other ways to expedite your invoicing process:
As a general rule, use the right language in your invoices and avoid billing jargon.
For instance, if the invoice says "Net 60," your clients may not realize that you expect them to pay within 60 days. Simply state the due date, such as "Please send payment within 60 business days of receiving this invoice" or "Due by (date)."
As mentioned above, it pays off to use invoice management software. This type of program can make it easier to handle accounts receivable and avoid late payments.
Depending on your needs, you may use free or premium invoice management software programs. Premium products offer a wider range of features, but the fees can add up in the long run.
A complete solution for freelancers is Hectic. With this program, users can manage projects, create and send invoices, and track their expenses—all from one location.
Hectic also takes the stress out of accounting. You can use the app to manage your finances, generate profit and loss reports, track your hours, and more.
Did we mention that you can try Hectic for free? That's right—you can manage your projects, invoicing, billing, and other business processes for your first client at no charge.
Regardless of the invoicing system used, make sure you and your clients agree on the payment terms before you start working together.
Use Hectic to draft a contract or agreement for prospective customers. This document should state the terms of your service, including the payment options and conditions. Be clear and stay away from industry jargon.
Another way to manage your accounts receivable more easily is to ask your client to make upfront payments, such as 50% of the total invoice amount. You can also work for clients on retainer and charge upfront for the services delivered over the next months.
Attorneys, for example, often ask their clients to pay retainer fees in advance. As a freelancer, you can do the same.
This strategy will not only increase your cash flow but also prevent you from getting scammed. Plus, you'll have enough funds to cover additional expenses for software and other products needed to complete the project.
Managing your accounts receivable requires some planning. Consider the issues you're currently facing and then look for solutions. For example, if a client is always paying late, send him automatic reminders every week.
You may also set up a retainer agreement or even offer a discount for early payments. Send invoices at agreed intervals or after finishing work to increase your chances of getting paid on time.
Meanwhile, check out our guide, The art of freelancing, for other tips! We'll help you determine how much you should charge, where to find work, how to market your business, and more.