Watching the Account Payable Metric

There are various numbers that help you keep an eye on your freelancing business. An under-appreciated one is the current size of your accounts payable. That refers to all the companies that owe you money at any one point. The reason AP totals are important is that they become an early warning sign of cash flow problems. Take your monthly revenue goal and divide the AP total by it. That shows how many months of revenue you're expecting in at any given time. I find that the number needs to be between 1.5 and 2, meaning that at any time I'm owed between one-and-a-half and two months worth of invoices. In that range, I can expect a regular flow of funds with clients paying between 45 and 60 days. If the number drops below that, then it doesn't matter how much I've just billed out, because I don't have invoices old enough that I can realistically expect checks. If you've had problems getting cash in and you don't have enough on hand to act as a cushion, or even if you do, consider working to increase your billing for a few months so you begin to develop a backlog that will help provide more dependable cash flow.