“How can I increase my billable rate without risk?” is a question I get quite often while doing Skype onboarding for WiseCash. I’ve extracted the typical answer I make here.
In essence, my answer is to make sure you know your cash runway then pick the right moment — but here is a concrete situation for a beginner freelancer.
Meet “Tom”, Freshly Minted Freelancer
“Tom” is a freelancer just getting started.
Even if he is a seasoned coder, Tom doesn’t feel yet very confident at the beginning of his freelancing journey. Something I can understand: it’s a dive into a whole new world, and even if he is well prepared and he read books on the topic, he feels a bit insecure.
He looks for his first customer, and after some time in his local tech meetups, ends up meeting a first lead who is interested in his skillset.
When asked for his daily rate, Tom replies “350€ per day”, yet he appears a bit unconfident. As a consequence, the potential customer replies: “I’m in, but only 300€ per day”. (Do not focus on the specific amount which may vary depending on your country.).
Maybe Tom is sending a “negative” signal of lack of confidence, either because he is just starting up, or because he feels the need to make money.
No matter the reason, Tom is a bit pressured. He ends up accepting the first contract at a reduced rate because he needs money.
The gig starts. The customer is happy! It turns out Tom is doing a great job.
The first month of work is almost over, and Tom is going to send his first invoice.
Good news! The customer wants to book more days, even months.
But Tom feels a bit of frustration. Even if he is happy about his consulting gig and would like to continue, he regrets his own lack of firmness to defend his initial billing rate.
He would like to renegotiate but is afraid to lose his client (or the income it represents).
How can Tom renegotiate with limited risk?
The advice I give to Tom at this point is to use cash flow forecasting and compute his runway.
“Use the Cash Flow Forecasting, Luke!”
Let’s imagine Tom has the following cash flow elements:
- current bank account: € 100
- planned income: 20 days x € 300 = € 6000 per month
- planned expenses:
- salary to support his lifestyle: € 2000 per month
- associated taxes (let’s imagine 25% of annually emitted invoices, so € 1500 per month)
Feeding that data into WiseCash, we can figure out what is Tom’s runway (computed today) if he manages to keep the contract going for 1, 2, 3 or 4 months:
We’re simulating ahead of time, so we must adjust the runway to account for time passed:
|Months of contract||Runway (evaluated after first payment)||Runway (at time of last invoice)|
|1 month||80 days||80 days (80 - 0 days)|
|2 months||111 days||81 days (111 - 30 days)|
|3 months||172 days||112 days (172 - 60 days)|
|4 months||233 days||143 days (233 - 90 days)|
Here comes “Power Tom”
To his surprise, Tom now realizes he has a runway of more than 2.5 months after first invoice!
Depending on his connections, skill level and ability to sell himself, Tom will react differently:
A - Immediate renegotiation
In this scenario, Tom feels confident enough with 80 days of runway. He knows he will be able to find another gig and get paid in that timeframe.
Tom goes back to the client and commands his initial rate, without fear of losing the contract (and very often, it works, because Tom now feels much more confident!).
B - Delayed renegotiation
In this scenario, Tom feels he needs at least 143 days of runway. WiseCash tells him that he will reach that runway after 4 months of contract.
Tom keeps up the good work and builds up his runway. He will wait until the fourth payment to renegotiate or leave.
Doing so will give him time to read up on negotiation/pricing.
In parallel, Tom will maybe look for a new client while his current gig is going on, now with more confidence and knowing that his cash flow is getting better over time.
That’s all for today! Feel free to contact me in case of questions!
If you want to learn more, read Why Knowing your Cash Flow Runway is a Killer Tool.
Thanks for sharing this article around!
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