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I don't know if it's economically correct, but as a self-employed person—been at it for a decade now—who still struggles profoundly with cash flow issues (combi

I don't know if it's economically correct, but as a self-employed person—been at it for a decade now—who still struggles profoundly with cash flow issues (combination of recurring revenue from software and one-off revenue from consulting to get to break-even), I tend to look at dollars as having different values based on whether they occur in a predictable stream. To me, $1 of recurring revenue, paid on any schedule, is worth at least 4x-5x any sort of one-off project revenue. And conversely, because of cash flow, $100k in self-employed dollars is worth a lot less than $100k in W-2 dollars, despite the higher effective tax rate on the W-2 income. Once you take a discount for cash flow volatility, $100k in unsteady self-employed dollars can afford you a lot less lifestyle, savings, etc., since you can afford fewer and smaller recurring costs if you don't want to be eaten alive in late fees, interest, hits to credit, etc. because you get paid tomorrow but the bill is due today—the bane of my particular existence, living the dream. I suppose that goes with "a dollar today is worth more than a dollar tomorrow". W-2 income is also more valuable, pound for pound, because of specialisation. In our industry, one can earn a steady six-figure paycheck for doing more or less one job in W-2 land, or one can earn an unsteady six-figure paycheck for doing all the jobs in SE land.

Robotbeat 9y ago
The difference between consistent and non-consistent revenue becomes a lot less extreme if you keep a healthy amount in a highly liquid bank or (preferably) credit union account. 3 months annual expenses at least (as a goal). Or, if you projects are REALLY chunky and few and far between, then more like 6 months or a year.
- embwbam 9y ago
  This is very true, IF you can get over the psychology. I passed 5y of savings and investments a long time ago, but my relationship with money changes dramatically depending on whether I have good cash flow or not.
  - abalashov 9y ago
    Indeed. Crap cash flow can lead to a poverty-type mindset of privileging the short term at the expense of the long, even if you're not actually poor (not from the IRS's point of view, anyway—possibly the bank's), because the unpredictability can undermine any effort systematic and long-term decision-making. After a while it can feel Sisyphean. Just when you secure more recurring revenue, you lose an old customer or get slapped with an unexpected large expense. One step forward, two steps back kind of thing. Every day. So, it's easy to preach very sanctimoniously about the paramount importance of good money management as a self-employed person, but it's another thing to do it, and I find that's true for a lot of self-employed folks. Back when I had W-2 income, I really had it together; great credit, putting away $1k+ every month, all bills always paid on time, etc. Since then, not so much, and it's not because I suddenly got massively profligate. You just give up trying to put the ducks in a row when life keeps sinking them over and over.
c3534l 9y ago
Yeah, that's volatility. I'd talk to a financial advisor. There's plenty of financial products and investments that can help you reduce that.
ThrustVectoring 9y ago
You need to have way more of a buffer held in cash and probably a significant lifestyle cut. Paycheck-to-paycheck sucks but is workable if you're a W-2, but absolutely insane if you're self employed. Like, money you earn today should get earmarked to expenses you need to pay six months from now. The discount for self-employed dollars should be keeping six months of expenses in cash rather than invested in the market - if that's $30k and you lose out on 4% gains, that's only $1.2k per year.
- ryanmarsh 9y ago
  Yes this has been really tough for me to learn. My cash outflows can vary by up to $30k per month. I’m self employed and often have to travel and various clients pay me net 30,45, or 60. I thought maybe 60 days of cash would cover net 60 but it turns out I need more like 180 days of cash.
  - kayhi 9y ago
    Maybe instead of negotiating rate, you get all your clients to pay on net 30
    - sokoloff 9y ago
      Get clients to agree to pay net-30 is easy. Getting them to actually pay net-30 is much harder.
      - Maultasche 9y ago
        One tactic I've heard is to increase the price by 5% and then give them a 5% discount if they pay within 30 days. I've never tried this myself, but I've heard that this greatly encourages prompt payment because everyone loves a discount.
        abalashov 9y ago
        I offer significantly higher discounts than that for quarterly or annual prepayment, in the case of recurring revenue. Cash is king. Even to the degree where taking a 12-25% haircut can be worth it.
lazerpants 9y ago
You need to establish a revolving line of credit (held by your business) with a bank you already work with. These sorts of scenarios are exactly what revolving lines are for. Interest rates are typically quite low if the bank sees overall positive cash flow through your business account. I suspect you could get a 20k line with minimal effort.
- abalashov 9y ago
  Not a chance. Been having that conversation with banks for years. Banks don't see any assets in a pure service business like software/consulting that can be collateralised, and my personal credit is long-ago shot. Nobody lends or writes credit on prospectus for a business they don't understand. A credit card with a ~$1000 limit is about the snow-capped summit of what I could reasonably get.
huherto 9y ago
You have received great advice already. I just wanted to add in case you don't do this already. Your hourly rate should be a lot higher when they only hire you for a few hours than when it is a recurring revenue. You want to motivate your customers to opt for the recurring revenue.
mnx 9y ago
If latency is not a problem, but the production/consumption is unsteady, use a large buffer. Works in programming, works in personal finance.
lpolovets 9y ago
This is a great example of different sources of money being valued differently by someone. Thanks for sharing! (I'm the post's author.)
jldugger 9y ago
> To me, $1 of recurring revenue, paid on any schedule, is worth at least 4x-5x any sort of one-off project revenue. Congratulations, you have discovered Present Value.
thevardanian 9y ago
What you're saying isn't about inherent worth of a dollar, but rather the basic management of money. Your future expectations of a recurring stream of income changes your behavior, that is you are effectively worth more if you have a recurring salary, but the inherent worth of a dollar doesn't change. So it's not that the recurring $1 is "worth more", but rather you have more than just $1, you have all the future accumulation of that recurring income. At least that's how people perceive it. Similarly debt is in the same sense future earnings perceived as current earning, and it leads to very poor financial planning. Even if you have a recurring stream of income you shouldn't spend your future income now, unless of course it's some kind of investment that will put your money to work in some way.
FooHentai 9y ago
>since you can afford fewer and smaller recurring costs if you don't want to be eaten alive in late fees, interest, hits to credit, etc. because you get paid tomorrow but the bill is due today—the bane of my particular existence, living the dream. What on earth are you doing, not maintaining a buffer?
- abalashov 9y ago
  Two problems with buffers: (1) never making quite enough money to get ahead of expenses enough to create one, (2) I owe significant back-taxes. Any larger liquidity event that could otherwise be used to establish a buffer goes to try to pay down taxes owed. There's little point in accumulating assets when they can just be levied by someone you owe a lot of money to. At that point you might as well just cut them off at the pass and give it to them voluntarily.
walshemj 9y ago
Self employed you should aim for 3x your W2 rate at least that's what IT contractors aim for in the UK

Robotbeat 9y ago

The difference between consistent and non-consistent revenue becomes a lot less extreme if you keep a healthy amount in a highly liquid bank or (preferably) credit union account. 3 months annual expenses at least (as a goal). Or, if you projects are REALLY chunky and few and far between, then more like 6 months or a year.

embwbam 9y ago
This is very true, IF you can get over the psychology. I passed 5y of savings and investments a long time ago, but my relationship with money changes dramatically depending on whether I have good cash flow or not.
- abalashov 9y ago
  Indeed. Crap cash flow can lead to a poverty-type mindset of privileging the short term at the expense of the long, even if you're not actually poor (not from the IRS's point of view, anyway—possibly the bank's), because the unpredictability can undermine any effort systematic and long-term decision-making. After a while it can feel Sisyphean. Just when you secure more recurring revenue, you lose an old customer or get slapped with an unexpected large expense. One step forward, two steps back kind of thing. Every day. So, it's easy to preach very sanctimoniously about the paramount importance of good money management as a self-employed person, but it's another thing to do it, and I find that's true for a lot of self-employed folks. Back when I had W-2 income, I really had it together; great credit, putting away $1k+ every month, all bills always paid on time, etc. Since then, not so much, and it's not because I suddenly got massively profligate. You just give up trying to put the ducks in a row when life keeps sinking them over and over.

c3534l 9y ago

Yeah, that's volatility. I'd talk to a financial advisor. There's plenty of financial products and investments that can help you reduce that.

ThrustVectoring 9y ago

You need to have way more of a buffer held in cash and probably a significant lifestyle cut. Paycheck-to-paycheck sucks but is workable if you're a W-2, but absolutely insane if you're self employed. Like, money you earn today should get earmarked to expenses you need to pay six months from now. The discount for self-employed dollars should be keeping six months of expenses in cash rather than invested in the market - if that's $30k and you lose out on 4% gains, that's only $1.2k per year.

ryanmarsh 9y ago
Yes this has been really tough for me to learn. My cash outflows can vary by up to $30k per month. I’m self employed and often have to travel and various clients pay me net 30,45, or 60. I thought maybe 60 days of cash would cover net 60 but it turns out I need more like 180 days of cash.
- kayhi 9y ago
  Maybe instead of negotiating rate, you get all your clients to pay on net 30
  - sokoloff 9y ago
    Get clients to agree to pay net-30 is easy. Getting them to actually pay net-30 is much harder.
    - Maultasche 9y ago
      One tactic I've heard is to increase the price by 5% and then give them a 5% discount if they pay within 30 days. I've never tried this myself, but I've heard that this greatly encourages prompt payment because everyone loves a discount.
      - abalashov 9y ago
        I offer significantly higher discounts than that for quarterly or annual prepayment, in the case of recurring revenue. Cash is king. Even to the degree where taking a 12-25% haircut can be worth it.

lazerpants 9y ago

You need to establish a revolving line of credit (held by your business) with a bank you already work with. These sorts of scenarios are exactly what revolving lines are for. Interest rates are typically quite low if the bank sees overall positive cash flow through your business account. I suspect you could get a 20k line with minimal effort.

abalashov 9y ago
Not a chance. Been having that conversation with banks for years. Banks don't see any assets in a pure service business like software/consulting that can be collateralised, and my personal credit is long-ago shot. Nobody lends or writes credit on prospectus for a business they don't understand. A credit card with a ~$1000 limit is about the snow-capped summit of what I could reasonably get.

huherto 9y ago

You have received great advice already. I just wanted to add in case you don't do this already. Your hourly rate should be a lot higher when they only hire you for a few hours than when it is a recurring revenue. You want to motivate your customers to opt for the recurring revenue.

mnx 9y ago

If latency is not a problem, but the production/consumption is unsteady, use a large buffer. Works in programming, works in personal finance.

lpolovets 9y ago

This is a great example of different sources of money being valued differently by someone. Thanks for sharing! (I'm the post's author.)

jldugger 9y ago

> To me, $1 of recurring revenue, paid on any schedule, is worth at least 4x-5x any sort of one-off project revenue. Congratulations, you have discovered Present Value.

thevardanian 9y ago

What you're saying isn't about inherent worth of a dollar, but rather the basic management of money. Your future expectations of a recurring stream of income changes your behavior, that is you are effectively worth more if you have a recurring salary, but the inherent worth of a dollar doesn't change. So it's not that the recurring $1 is "worth more", but rather you have more than just $1, you have all the future accumulation of that recurring income. At least that's how people perceive it. Similarly debt is in the same sense future earnings perceived as current earning, and it leads to very poor financial planning. Even if you have a recurring stream of income you shouldn't spend your future income now, unless of course it's some kind of investment that will put your money to work in some way.

FooHentai 9y ago

>since you can afford fewer and smaller recurring costs if you don't want to be eaten alive in late fees, interest, hits to credit, etc. because you get paid tomorrow but the bill is due today—the bane of my particular existence, living the dream. What on earth are you doing, not maintaining a buffer?

abalashov 9y ago
Two problems with buffers: (1) never making quite enough money to get ahead of expenses enough to create one, (2) I owe significant back-taxes. Any larger liquidity event that could otherwise be used to establish a buffer goes to try to pay down taxes owed. There's little point in accumulating assets when they can just be levied by someone you owe a lot of money to. At that point you might as well just cut them off at the pass and give it to them voluntarily.

walshemj 9y ago

Self employed you should aim for 3x your W2 rate at least that's what IT contractors aim for in the UK