One of the most overlooked aspects of business is the ‘Working Capital’; especially if you work online. Most people that work online don’t seem to understand the concept of working capital, which if you have not done any financial or business studies, this is not surprising. Understanding and keeping a working capital in your business can give your business several advantages.
- No loss of reputation
There is nothing worse than hiring a freelancer that turns around after the hire and says that he/she has no money for a certain piece of software or whatever it is they need to get the job done. I hate this! It means the freelancer does not have good financial management skills and usually that worries me.
In my own business I usually charge 50% up front or if I am using UpWork or a freelancer website, then I am paying out of my own pocket until the job is delivered and all is agreed on UpWork for the payment to be approved.
Imagine this – I get the contract and then say to the client:
‘Please can you release the first milestone payment, so I can pay for the software and tools I need to get the job done’.
That may work if it is a very small job, but as I usually aim for high end work, the customer is going to think or maybe even ask:
‘If this guy is so successful, then where is his working capital for this type of work?’.
Firstly, I will have set alarm bells ringing in the customer’s mind. Secondly, the customer is probably not going to trust me. Thirdly, I will most likely create more work for myself because the customer will constantly check up on me as it is human instinct for people that are worried about their investment.
Last of all, the chance of repeat business may be quite low because you have already lost your reputation and looked unprofessional.
If you are just starting out as a freelancer, then no problems at all – any customer will understand. In this circumstance I am speaking about established businesses like mine that sells itself off the back of high work already completed.
However, far too often have I seen people that look as if they have a lot of business and a large business set-up, but in actual fact they are flat broke.
Think about this – imagine you were a large company looking to outsource:
- Would you deal with a company that appears broke for your high-end project?
- Or, would you deal with a business that appears to have a lot of cash already
Making yourself seem in demand and not appearing to worry too much about the money will make your business not only appear much more professional, it will also help your reputation because the person hiring you is usually an employee and assumes you are wealthier than them because you have your own business. This is where you also gain a lot of respect.
- You always have a buffer
Now as an online entrepreneur making roughly $4,000 a month in salary living and working in Thailand, I often hire people to work for me. Freelancers are the bread and butter of my business, which overall turns over more than $10,000 a month at present. That means software, expenses, and freelancer payments cost me around $6,000 a month. Wrong!
I keep back $500 to $1,000 a month in my business as profit. This is basically savings for my business. Now my savings over 7 years online should be around $70,000. Well wrong again!
It was not until about 4 years ago did I begin thinking about my ‘Working Capital’. I landed a great SEO contract on UpWork doing outreach. However, there were so many delays on my side because I had to wait for other contracts to pay so I could hire the Outreach freelancers as well as content writers.
In the end, I was writing the content myself. You can imagine – I am dealing with other customers, organising a content strategy, then taking 3 to 4 hours a day out of my life writing articles to be placed on the sites that agreed to publish my client’s content. In the meantime, I was not able to keep my eye on advertisements for new contracts.
Furthermore, I remember one of my local clients paying quite well needed regular meetings. That was a nightmare because I live in Bangkok. It would take the best part of half a day just to meet the client and go through the project with him.
Cutting a long story short, something as simple as not having a working capital meant that I was juggling money between freelancers, working in my own business, doing more hours than I needed to (such as writing), and actually if I look back at my hourly rate for that time, I was earning around $15 an hour as a business owner.
The lesson I learned was that if I keep a working capital my freelancers always get paid. When a new job comes in, I can use my savings and plant that into my working capital. My freelancers are happy, my customers know I am a professional business owner, my work gets delivered on time, and my time spent in my business is productive.
- You will not have delays from Freelancers
If you run any business, one of the most important factors is getting your employees paid. In part 2 above I spoke about hiring a client I could not handle. The reason I did not have money to invest in getting the client’s job done was because I treated all profits as my salary.
I would get paid in PayPal, First Choice, or in my bank account, and then my profits I would withdraw and spend. This is a huge mistake for any business; especially freelancers looking to build their freelancer career, so they can live a free life outside of the 9 to 5 rat race.
So, here is where the problem of paying myself negatively affected me in step 2 above when I got my first big client. I needed software, which I bought, I also needed outreach email guys, I needed a designer, and then writers. Granted, I had to do a lot of the writing myself, and also the keyword research and reporting. However, I cannot design, and the process of outreaching to clients is really not worth my time whatsoever.
My plan was to juggle incoming contract payments, wages for freelancers hired for other jobs, as well as my own lifestyle. That consisted of eating out a lot at expensive restaurants, travelling to the beach a lot, and shopping. This is not to mention I was not a home owner, so I had rent to pay my house, pay my son’s school fees, and my wife was not working because our son was very young. The list goes on!
As a result of my juggling, I messed up. You cannot always reply on all your clients paying for renewals on contract on time, you also cannot rely on all your freelancers delivering on time, so you can send out an invoice to get paid. Several of these factors came into play and in the end there were some freelancers I was unable to pay on time – I remember 3 I delayed payment by at least a fortnight.
What do you think happened?
My unpaid freelancer’s productivity went down. I spend a lot of time answering them asking when they would get paid and reassuring them that despite them continuing the contract without being paid for the last batch of work is OK. Well the result of this was they delivered slower, and 1 freelancer just stopped and said, ‘Let me know when you can pay me, and I am happy to continue’.
Now I am a freelancer down and have 2 freelancers working at a slower pace than usual probably because they were worried I would not pay. I also look quite stupid at this point.
Moreover, the knock-on effect is causing more delays, and causing me more work. I was suffering all because I did not have a working capital in place to pay these guys.
If I did have a working capital, all my freelancers would have been paid, money from the contracts that did pay on time could have been used for the new designer and outreach payments, and the payments that were late from other customers would not have been so important. All it would have meant was that I pay myself a little later than usual.
Effectively, my working capital would have given me an extra buffer of cash to juggle during that difficult time. In reality, I had no buffer and got myself in a tough situation that added an additional 4 hours a day to work week in the end!