One of the most stressful parts of being a small business owner can be managing an inconsistent income. Whether it is the weather, the economy, the changing of the seasons or just plain serendipity, your income can be “feast” one month and ”famine” the next.
How do you cope with an irregular income? Here are some strategies to help you stay afloat in a choppy sea.
Create a Budget Using Your Average Income
If you think a budget is only for people with predictable income, you are wrong. In fact, a budget is even more important if you have an unsteady income stream.
If you’ve been in business for at least three years, one way to create a budget is to determine your average net income for each year. Divide that number by 12 to create a monthly budget. Now subtract your regular monthly expenditures from that monthly number. If you are already in trouble, you will need to decrease the amount of money you spend on those regular expenses or figure out a way to supplement your income.
This method will not work well, however, if your income has a prolonged income dry spell, such as bad summer weather when your outdoor business depends on sales during those months. In this case, it is safer to build your budget around your minimum monthly income. By planning your budget on your worst month, you will create a lean budget with a safe buffer zone.
Keep Your Personal and Business Accounts Separate
Not only will this process make record keeping and accounting easier – especially at tax time — but it also helps you better handle an inconsistent income.
The next step is to determine a baseline salary for yourself. This amount should be what you need to pay your rent or mortgage and other regular household and personal bills. There may be times you need to draw more than this baseline amount, but if you try to keep these extra draws to a minimum, it will help you be ready for your lean months.
Set Aside Money When You Can
In addition to your personal checking account and your business checking account, set up at least one savings account. When times are good or when you land a big paying job, you can place income that is over and above your needs into this account. You can then draw upon these funds when times are tough and replace them when you can.
Aim to keep three to six months of net income in this emergency fund. You can use it for any of the following purposes:
- Medical or dental emergency
- Car repairs
- Emergency home expenses, such as a furnace break-down in winter, flood or fire
- Bereavement-related expenses
You could establish a long-term priority savings account as well. This account could hold money for a down payment on a new building, property tax payments, home or building down payment, retirement funds or child’s college tuition savings.
Establish a Thrifty Mindset
One of the temptations we all face when times are good is to overspend. An erratic income can teach you to maintain a cost-effective lifestyle. You can do this by looking for ways to save business costs whenever you can.
Be cautious with using credit. Despite the temptations credit cards offer, charge only what you can pay off at the end of each month.
Take a look at the list you made to create your monthly budget. What can be reduced from that list? Is there a less expensive alternative to a service you use on a regular basis? Think about renting new equipment rather than purchasing it. Consider items you can buy used instead of new. Can you hire a freelancer to do your marketing or bookkeeping instead of creating a staff position? Is public transposition a possibility to get to and from work each day?
If you have a life partner who makes a steady income, another idea is to try using that person’s salary for your living expenses and to use your salary for savings and for the unexpected.
Evaluate Your Budget Regularly
As your business grows and your experience widens, be sure to do regular budget check-ups.
Look for ways to cut spending and to supplement your income in the lean times. With practice, you will gain the confidence to ride out any storms your small business will encounter.