payment, budgetSo we set a monthly budget to know when we are going red. All money that we earn this month, we use to create a budget for the next month, and so on (PS. for us it’s not yet possible to create annual budget and reserve money for it).
Our income consists of:
work we do ourselves
work that we outsource
work that we do via freelancing websites
The first two points easily fit into our monthly budget as we get that money usually within 5 days we send an invoice.
However, money that comes via freelancing sites (oDesk, Elance,…) is a special story. Namely, if I submit the bill this week, money will land on our bank account is approx 20 days. So I am not sure how to treat this money - April earnings or May earning and how to calculate it into our May budget.
So it happens for example, than in April we earned $1000, but until end of April only $500 came to the bank account as other $500 comes from the freelancing sites and it will land on the bank account on 10 May.
So far, we calculated budget only from money we have on the back account. Not from money that will land in 10, 20, etc. days. This way I am sure we’re not dealing with ghost money, but rather with real money.
Can anyone share a piece of advice? I can elaborate our issue in more details if what I wrote so far is not clear.
Spend what you need to, not what you want to, or what you have. The risks of late payment, under payment and non-payment exist when you are a contractor/freelanceer. If each of your freelance payments come from different contracts with no prior relationship with the customer, then the risks will be constantly high.
We’re in slightly different boats - I’m a contractor since 1994 and I avoid short term contracts as there is too much pain and little gain. My monthly invoices would vary from 12-18,000, and my expenses (salary, travel, hotel etc) rarely go above 5-6000. The change sits in my bank account - I don’t look at it. It helps tie me over when I take time off to work on “self sponsored projects”.
Spending energy to predict income from a variable source, where demand/supply for your service is outside your control is, IMHO, wasted energy.
When working for a customer, you are earning X dollars/pounds/euros an hour. Your time is valuable - Taking that time and spending it on chasing money already earned and that in all likelyhood will come to you, even late, is less profitable than if you direct your energy to making your skillset stronger, or broadening your customer base.
I hope that helps
You need to decide whether you are going to use cash-based accounting or accrual-based accounting.
In Cash-based accounting, simply put, you record earnings/expenses when physically received/spent, not before or after.
In accrual-based accounting, you record your earnings when the service is rendered, or the product is “bought”. You then must keep up with those earnings/expenses in Accounts Receivable, or Accounts Payable, until the funds are physically received or given up. This is designed for relatively large companies who do a lot of contractual work, or do long-term projects with only partial payments up front. In this way, you can more easily justify salaries, wages, and other costs associated with the project.
If you have a lot of jobs with payment outstanding, accrual-based accounting can give you a better idea what your working capital and cash flow is. However, cash-based accounting is more traditional and conservative, which is why there is a classification in accounting called allowance for doubtful accounts. Just because you record the earnings does not mean you are guaranteed to receive them.
Any bets you make on that will depend on how risky you want your project investment portfolio to be. I would think you’d use accrual-based accounting if you had a payment coming in around 6 months; 20 days is not too long to wait. On the flip side, if its a sizable amount of money, and it helps you gain financial leverage with lenders, reporting earnings before received by 20 days is not likely to negatively affect you (so long as you stay in business).
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