Do You Understand Invoices Aren’t Money?
When you work and bill your clients, that’s only two parts of a three-step process. The finale is getting paid. And until that money is in your hands, the total on the invoice is basically meaningless.
Invoices are not income. An invoice is a record of debt. But excitement over invoices causes a lot of freelancers to struggle and go broke.
When they finish a job, they’re ready to relax and celebrate. They start spending their cash-on-hand. They start planning what to pay, where to go and what to buy when the money comes in.
That mentality is like draining the well when you expect rain. What if the rain comes late? Or, what if there’s no rain coming?
In this business, there a major difference between earning money and having money. If you lose sight of that line, you’re going to have a financial crisis on your hands.
I tried to make this point to a photographer/graphic designer who did work for a staffing agency. We’ll call her Kelly.
Kelly’s $4,000 Game Changer
This staffing agency project was a step up for Kelly’s. She was used to making $150 here or $300 there. With this job, she earned $4,000.
Invoice, income– it was all the same to her. $4,000 was a game changer and she had BIG plans.
The way Kelly talked about that money, you would have thought it was stashed in her mattress already. But it wasn’t. The contract gave the client 30 days to pay the invoice.
Meanwhile, Kelly had about $1,300. That included money in the bank and a credit card with a $500 limit.
The weekend after she finished that job she was clubbing and bar-hopping. Charge it please.
Then, she used some of her savings to get work done to her car. Deductions from savings.
Two weeks later, her and her boyfriend decided to get a place with another couple and she paid her share of the deposit and first month’s rent. Major deduction from savings.
Within three weeks, she was down to about $50, including cash and credit. And she was careless with these remaining funds because her $4,000 check was set to arrive the following Friday.
In Kelly’s mind, she wasn’t scraping the bottom of the barrel. She had plenty of money. Even once she replaced all the money she’d spent, she figured she would still have over $2,000.
Things didn’t work out that way. The check didn’t come as expected.
One week late turned into two and two turned into three. Finally, the company got tired of stringing Kelly along by the week and hit her with the news that they couldn’t pay her until they got paid from an upcoming contract.
Hello financial crisis.
So what did Kelly do? She did what a lot of freelancers do when they have cash flow problems. She started borrowing.
Borrowing against future income is a very bad idea. It’s an easy way to make a bad situation worse, which is exactly what happened.
By the time Kelly got that money (week 9) she had spent almost all of it. Her bills and debts were spiraling out of control and several other people, including her boyfriend, were in a bind because she borrowed money from them, promising to repay it quickly, but she couldn’t.
Once you fall behind like that, and you’re desperate for each payment to pay bills and debts that are due or overdue, you’re basically chasing a ball that’s rolling downhill. If you’re able to catch up it’ll be a long and tiresome process.
But a lot of people can’t catch up and it’s lights out for freelancing.
Live On Cash, Not Invoices
If you develop a habit of living hand-to-mouth, you have hard lessons on the way. When you base your life around outstanding invoices, you’re setting yourself up for disaster. You need to base your life on cash and have a backup plan for what you’ll do if money that’s owed to you gets delayed or isn’t paid.
I suggest at least having a month and a month in the hole. That means if it’s February, once February’s bills are paid, you should already have the money to cover March.
At a bare minimum, you should be able to see the way forward for at least 60 days. If you can’t, you should be worried because cash flow problems could easily shut down your show.