The only constant in consulting is that there are no constants in consulting — and that's especially true about the timing of income and expenses. Murphy's Law dictates that your server's motherboard will commit electronic hari-kari only after the river of receivables has run dry, so you need to have a plan for smoothing out your fiscal peaks and valleys.
It's tempting to put your expenses on a credit card and tell yourself that you'll pay it off as soon as you collect on your current big job — but that takes a ton of discipline. One of the bad things about a credit card is also one of its most useful features: You can use it for practically anything these days. So as times get a little tight, you might be tempted to put more expenses on the card — and stretch out your plan to pay it off even further into the future. Before you know it, you're paying a huge chunk of interest each month with no reasonable hope of paying off the principle within your lifetime. You've just made yourself a slave to the MasterCard.
A couple of years ago, my wife and I paid off all our personal and business credit cards and cut them up. We've been running on a cash basis ever since. Sometimes it isn't easy, but the long-term payoff is huge.
Without depending on credit, what strategies can an IT consultant employ to manage the uneven flow of expenses vs. income? Here are seven suggestions.
- Build cash reserves: The ideal solution is to have enough cash on hand to be able to use a check or debit card for everything. I don't know about you, but I'm not there yet. It requires discipline to put money into your reserves whenever you collect. That isn't easy if you've already got a pile of bills waiting to be paid.
- Use an interest-free charge card: For many years, I used American Express for business expenses. I was required to pay the account in full every month, so I wasn't tempted to let a balance accumulate. That can work well, but you have to keep a keen eye on exactly how much you're charging. Like credit cards, these charge cards can be used for almost anything, so don't fall into the trap of using it for everything when times are tight and assuring yourself that you'll pay it off "somehow" when that invoice comes next month. You might find yourself speaking with a collection agency.
- Get payment terms from vendors: Some companies will be willing to pay for your loyalty by giving you interest-free terms. I have an account with CDW, which bills me Net/30. That's just enough time for me to plan how I'm going to pay for that replacement router that I need immediately, because it matches my own cycle for billing and collection. CDW also gives me a discount from its normally listed prices. Sure, sometimes you can find better deals elsewhere — and if you have the cash available you can take advantage of that — but often, it's worth a couple of bucks to postpone payment for a few weeks. Again, you have to be careful to limit your purchases to what you can actually pay within the next month.
- Get your client to pay expenses directly: Especially when traveling for your client, the expenses can add up quickly: air fare, rental car, hotel, meals, etc. If you're including those on your monthly invoice with Net/30 terms, you may have to carry that balance for up to two months. If your client is willing, get them to book and pay for the big items directly. You can offer clients something in return, such as being more flexible on your travel schedule to get a better rate, accepting a cheaper rental car or hotel, or charging them less (or not at all) for travel time. I've also had clients pay directly for some of my equipment and software licenses when that equipment and software was dedicated to their projects.
- Get your client to pay for services in advance: This could improve your cash flow by 30 days (or more, if your client is habitually late), but it's only a temporary fix. It won't take long for you to get used to having that cash on the new payment schedule. Unexpected expenses will soon eat up that lead time.
- Cut expenses: The simplest way to improve cash liquidity is to put a stopper in the drain. Do you really need that high-end server, when an older model would serve your purposes just as well? On the other hand, sometimes the latest technology can save you money (e.g., replacing CRT monitors with low-energy LCDs). Anything else you can do to reduce power consumption can make a difference of up to hundreds of dollars a month — so turn down the heat and wear a sweater, and don't forget to put your systems to sleep at night (at least the monitors). Using free software solutions instead of purchasing proprietary licenses can save you a bundle, too. I can't speak for you, but 100% discount sounds pretty good to me. Evaluate whether paying for subscriptions and memberships in various organizations is doing anything for your bottom line. Sometimes the intangibles are worth it, but often they're not.
- Hire a good tax man: Don't rely on my tax advice, but you may be able to save thousands annually by filing your return in the most advantageous manner. A few hundred dollars spent on someone who knows all about sole proprietorships can be a very good investment. Bonus points if they used to work for the IRS.
All of these strategies can put more money in your pocket — at least in the short term. For the long term, you'll want to concentrate on growing your business.
Do you use any other strategies for maximizing your cash? If so, share your tips in the discussion.
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Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant blog, he also contributes to [Geeks Are Sexy] Technology News and his two personal blogs, Chip's Quips and Chip's Tips for Developers.