Tuesday, March 10, 2009

30-Day Economic Stability Challenge: Prioritizing Cashflow

You know the drill: You should have a good financial cushion in place before you start freelancing. But what if you don't, and you're already in business? Believe me, I've been there. Fellow freelancer Julie Sturgeon found an ingenious solution to her cashflow issues, so I asked her to share it. Generously, she agreed.

I especially like her method because it creates a "personal line of credit" without using a credit card or those home equity lines of credit The Simpsons lampooned on Sunday.
I hope you, too, will find it inspiring. I challenge you to look at your spending and see if there are funds you can reallocate to create your own cashflow line of credit.

Sturgeon is a Greenwood-based writer with more than 20 years of professional writing experience. Her resumé covers everything from lifestyle reporter to investigative reporter, sports writer to editor of two business-to-business magazines. She is also a former winner of the Writer’s Digest magazine feature article contest. Besides writing, her passions are traveling, Indiana University basketball and the movie Braveheart.

Back in April of 2001 — before the 9/11 attacks, a dot.com bust, Hurricane Katrina, a stock market crash and recession— I interviewed an analyst about cash flow for a trade publication.

A small-business owner has to stop worrying about profit and loss and start considering cash flow the lifeblood of the business," Alice Magos with Commerce Clearing House told me. "You can be terribly unprofitable and still survive as long as your cash is flowing — but by the time somebody learns that the hard way, they’re usually out of business."

It was a great quote in the article, but I wasn't a believer until my uncle confirmed it. My uncle, the small-business owner who has had his name on the outside of a funeral home for decades. Mu uncle, the man we considered the rich family member because he could actually spend money shooting at basketball hoops at a carnival until he won the big stuffed animal prizes. Yep, he confirmed, he rarely showed a profit on his taxes.

So I got it: The trick is to have money at your fingertips when you need it. But it wasn't something I focused on. After all, the cash was flowing automatically as I continued to earn more every year and incorporate my business. I set up charts to rate the profitability of each client. I cut the bottom 10 percent each year to improve those profitability numbers. I raised my minimum several times to maximize my time in the office.

And now it’s 2009, and suddenly whether or not any particular assignment earns my hourly minimum is moot. I need X dollars in my bank account each month to pay my set expenses. My accountant suggested we set up a small line of credit at the bank to draw from on those months when collections trailed behind the bill due dates.

My husband had an even better idea. He added up our mortgage payment, our monthly payment on the home equity line we took out to remodel the kitchen, and the amount we were paying back to our 401(k) plans we borrowed from when a business failed in 2007. If we remortgaged to roll all those into one payment, it would extend our timeframe to own the house free and clear from 8 years to 15, but the new interest rate meant that one payment came to only a few dollars more than the current mortgage. Essentially, the plan freed up nearly $1,700 a month in financial commitments in our household.
Starting this month, we are putting that money into a savings account as my personal line of credit. I’m not a big stickler on profit these days — in fact, I’ve lowered my hourly minimum expectations by $25 an hour — but I have the safety net I need to avoid being abused by slave wages, too. And should I need to draw on those emergency funds, I’m confident my husband will have a kinder interest rate than the bank.

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