Net Zero
A freelancer sends an invoice, you won’t believe what happens next.
About five years ago I started an agency. (It’s called Ueno, it’s great.) I was the only employee for the first year so as the projects started coming in I had to rely on freelancers quite a bit.
As it happens, I knew the world of the freelancer very well. I’d been one myself for eight years and had been through many ups and downs during that time.
And I knew that one of the hardest things about being a freelancer is dealing with your cash flow.
Now, I know I just lost many of you. “Cash flow? Zzzzzzz”. But I need to start there because cash flow is one of those things that control your life whether you know it or not.
So, let's start with some graphs (see, we’re already having fun!!).
For the first graph, we’re looking at a 90 day period. In this example you are a full time employee and we’re going to assume you get paid at the beginning of each month (those are the big green columns). During the first couple of days of each month you’re also hit with some major expenses, rent probably being the biggest one (those are the biggest red columns). For the rest of the month you have other expenses, food, gas, and various bills (those are the small red columns).
By the way, for this example I’m assuming you have no debt — which is not very common but like every good economist my models are not based on reality.
The faded green chart in the background is the status of your bank account. Each month starts off with you having some money (and then as it progresses you have less and less and by the end of the month you have very little, if anything, left).
You’re living paycheck to paycheck. It’s not a great system but it sort of works. You can structure your life around it without having a ton of anxiety (again, I’m ignoring the fact that any slight hiccup and you’re screwed, capitalism yay!).
But now let’s look at what this looks like if you are a freelancer. For simplicity let’s assume you have the same exact income over a 90 day period as you had as a full time employee but this time the money comes in later and at pretty much random times.
Now, the expenses didn’t change, you still have to pay rent at the same time and gas prices didn’t go down. You did the exact same amount of work and you got paid the exact same amounts.
The only thing that’s changed is when you get paid. Instead of it happening at the beginning of each month you now have to wait.
Sometimes you get paid 30 days after you complete the work and invoice, sometimes 45 days, sometimes it might be 60 or even 90 days. In contract terms this is called Net 30, Net 45, Net 60 etc.
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And as you can see, the result of those payment policies is that even with the exact same income and exact same expenses you are always in the red (the status of your bank account is that faded red thing below the graph). In short, you never have any money in the bank — In fact you actually owe a lot of money.
In these hypothetical models the end states are the same since we assume that you pay no interests on the debt you take but obviously that’s not realistic. But even ignoring that, in the real world there is also no end state, you never actually catch up (Zeno would be proud), you are really always in the 30–60 day period on the graph.
And that in the nutshell is how cash flow works. When you get paid is sometimes more important than how much you get paid.
Entire industries are built on taking advantage of this principle. The faster you get money in and the longer you wait until you have money going out, the more money you actually have access to and can use.
Anyway, now that we’ve talked about cash flow we should get back to the thing I wanted to talk about.
As you may remember from earlier, I was a freelancer for a long time when I started Ueno. I had very painfully dealt with this issue for eight long years.
I did not have access to any real credit so I would often have no money, the money available to me was usually somewhere around zero.
But there were some great people out there that always paid fast. Notably, my friend Phil has an agency called Upperquad and he would always pay me pretty much straight away when we worked together and that would often be the only reason I had money to pay my rent. People like Phil made it possible for me to be a freelancer.
Which finally gets me to the point, because of all of this, the one thing I decided very early on was that for Ueno’s freelancers we would effectively have a Net Zero payment policy.
Which is fancy talk for: you get paid the day we receive your invoice.
Now, there were three reasons I wrote this article.
One, I wanted to talk about cash flow since I rarely get to use my finance education. Two, I’m needy and i wanted to brag about our great policy and get you to really like me and my company because I want attention and praise and love. And three, and most importantly, I want to ask you to advocate for a similar policy at your company.
It doesn’t need to be Net Zero. Maybe you can try for 5 days or 10 or even 15. But please don’t do 30 or 45 or 60 or 90. And please, please don’t accept having freelancers hounding your company for payment after it becomes due. It’s extremely stressful and creates unnecessary anxiety.
You might be asking yourself, but I don’t create these policies, I’m not in the finance department, what can I do? Here’s all I ask, just go find out what your companies policies are. And if you don’t think they are fair maybe talk to some of your coworkers about them.
And then get them all together and get some red flags and pitch forks and storm the fucking castle. Or write a nice email to your CEO and CFO and ask them to look into it. Either way, it’s your call. You do what you think will work best, I’m just throwing ideas out here. But do something.
Well, that’s it. Join me next week when we will talk about derivatives and how they can help you loose weight.
(I do need to caveat here that legally our contracts don’t have Net Zero in them anywhere. We contractually have longer payment terms as a buffer in case there are any issues with the work. But those are very rare and in almost all cases freelancers get paid same day).
Haraldur Thorleifsson is the founder and CEO of Ueno. He would like you to come and work with him, maybe.
