You will be able to tell a normal dip from a trend that needs action.
The holding account balance drops in a month when two clients pay late. You feel a small knot in your stomach. Is the business in trouble, or is this just a slow month? Most freelancers swing between ignoring that question and panicking about it. Neither helps. The holding account can answer it, if you know how to read it.
One weak month is normal for irregular income. That is the whole reason the base-pay method has a buffer. A client pays late, a project slips into the next month, a quiet season arrives on schedule. The holding account dips and then recovers.
A trend is different. When the holding account falls for two quarters in a row, it is no longer a single weak month. Something about the business has changed, and waiting for it to sort itself out is how a manageable problem becomes a crisis.
Here is Mei's year, with figures made up for the example. Her holding account balance at the end of each quarter was S$14,200 in March, S$13,100 in June, S$11,600 in September and S$10,300 in December.
The fall from March to June was S$1,100. On its own, that could have been seasonal, and she checked it against the same quarter last year before deciding. The fall from June to September was S$1,500, and that made two quarters in a row. By September it was a trend, and the December figure, down another S$1,300, confirmed it. Her buffer target is S$13,800, and she had been below it since June.
Plot your own month-end balances on a simple chart and the difference between a dip and a trend becomes easy to see. A dip looks like a V. A trend looks like a staircase going down.
A falling balance has four common causes, and each has a different fix.
Fewer clients or fewer jobs means volume has dropped. The fix is in finding work: more outreach, asking past clients for referrals, or a new service. Prospecting: build a pipeline that does not run dry covers the sales side.
Lower prices means you are doing as much work for less money, perhaps through discounts or a retainer below your usual rate. The fix is in your rate sheet from lesson 7.4.
Slower payment means you are earning the same but the money arrives later. The fix is in your payment terms and chasing schedule from lesson 7.3.
Higher costs means more is going out. Check your business costs and your pot transfers for anything that has crept up.
Mei looked at her income figures from her quarterly checklist. Her invoicing was roughly level with last year. But her overdue invoices had grown from S$1,200 at the end of March to S$4,800 at the end of September. Her problem was slower payment, not less work. Two agency clients had moved to longer payment cycles without telling her.
Mei's case is common, and it is easy to miss. Sales look fine. The work is coming in. Every invoice will probably be paid in the end. But money you have not received cannot pay your base pay, your MediSave or your rent.
So watch the overdue total as closely as the balance. If it rises quarter after quarter, you have a cash problem even while sales look healthy, and the fix is in chasing and terms, not in finding more work. Finding more work from clients who pay late can make the cash problem worse.
If the trend continues after you have found the cause and started the fix, cut base pay. Cut early and by a small amount, such as S$100 or S$200 a month, rather than late and by a lot.
A small early cut slows the fall and gives the fix time to work. Waiting until the holding account is nearly empty forces a large cut all at once, often at the worst time, or pushes you to borrow. If you are tempted to cover a gap with a loan, read lesson 3.2 of How money works, Why a flat rate loan costs nearly double what it looks like, before you sign anything.
Mei cut her base pay from S$2,300 to S$2,200 in October, which still covered her essential spending of S$2,200. She called both agency clients, moved them to milestone payments for new work, and planned to restore her base pay once the holding account was back above target for a full quarter.
Your own chart needs only twelve numbers, one for each month-end. Find them in your bank statements, plot them in order, and then look at the shape before you look at the figures.
Chart your holding account balance at the end of each month this year and write what the trend says.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).