Starting and running your own business is the epitome of the American Dream. Who wouldn’t love to be their own boss, the master of their own destiny? As ideal as that may sound to many, it can also be scary to take that leap of faith knowing that you, and you alone, are responsible for generating income.
When you are an employee, you’ll generally have a set income (barring those who work off commission, of course) and can allocate your money accordingly based on your paycheck. But, when you are the business owner, your income is based primarily on how well your business is performing.
Small businesses are notorious for irregular income, especially when you are first starting out. Fluctuations in cash flow can make or break your business. Whether you experience irregular income due to the seasonality of your industry or if you depend on the sporadic payment of clients, it is essential to be prepared.
At the end of the day, it all comes down to budgeting. If you set up your budget in anticipation of irregular income, your small business will inevitably fare much better.
Use these five steps to ensure that your business is prepared for income irregularity:
Account for Fixed Expense
Every month, there are expenses you know you will have to pay and that are pretty consistent in terms of amount. Fixed expenses like your rent or mortgage, health insurance, and Internet access typically don’t fluctuate from month to month. Know how much you need every month and be sure to set that amount aside. These expenses are vital to keeping you in business.
Estimate Variable Expense
Just like with fixed expenses, there are some costs that you know you will have every month, but the actual amount of these bills can fluctuate. Expenses like air conditioning, heat, electricity, and water are often determined by how much you use. As your business grows, these expenses will inevitably grow. It’s best to estimate these costs based on several factors, including historical data (about how much it usually costs), the time of year (things like A/C and heat vary significantly based on the weather), and how many employees you have. Plan to spend on the higher end of your estimation, but hope that your expenses fall lower.
Limit “Luxury” Expenses
We all fall victim to this. You want the best tools and equipment that money can buy. After all, this is your business. Investing in it will pay off in the end, right? This may be true, to an extent. After accounting for fixed expenses, which don’t have much wiggle room in terms of pricing, it is critical that you are able to measure the ROI on any expense. Sure, it’d be great for each of your employees to have an iPad, but can you justify that expense in your long-term strategy? Eliminating the luxury expense or going with a second-tier option can make more sense until you have enough cash saved up, especially for businesses with irregular income.
Estimate Your Monthly Revenue
Revenue projection is a necessary evil. It can be extremely difficult to pinpoint what you think your income will be each month, but it’s important to get as accurate an estimation as possible. When estimating, it’s best to err on the side of caution and project low. Take into account any sales and promotions you will be running that month, as well as any outside factors. Is there an event scheduled near your restaurant that will drive foot traffic in the door? Is there going to be construction in your parking lot that may decrease traffic? If it could affect your bottom line, be sure to incorporate it into your projection.
Expect the Unexpected
The one thing that you learn pretty quickly when you’re a small business owner is that there is no way that you can plan for everything. Any number of things can happen that you failed to anticipate, from a broken air conditioning unit to road closures near your place of business. All these things can inevitably affect your bottom line. While it definitely helps to have an emergency fund for rainy days, sometimes the ‘unexpected’ emergency can completely drain your cash reserve. It’s important to have a contingency plan in place for such events. Depending on the circumstances and the amount needed, you can rely on personal savings or borrowing from friends and family to tide you over. If this isn’t an option and you don’t need money immediately, applying for a loan from the bank is always a possibility. But oftentimes emergencies are time-sensitive and you’ll need capital quickly. Short-term business loans from alternative lenders can help you get access to the money you need in within a short time-frame.
Irregular income just comes with the territory of being a small business owner, particularly if your business is seasonal. Knowing your bottom line and planning your budget accordingly is the key to keeping yourself in business.
Christina Memorio is an SEO Specialist at Business Financial Services. Her content covers a wide variety of topics relevant to small-business owners, from financial advice and alternative funding solutions to social media and content marketing practices for SMBs. Connect with BFS on Twitter.