Dealing with the highs & lows of unpredictable income
Dealing with an inconsistent income is one of the hardest and most stressful aspects of being a solo entrepreneur. One minute it’s a feast, next a famine—and it is hard to predict which is coming next.
This is not just a problem for your nerves: not knowing where your next paycheck is coming from makes cash flow predictions impossible and budgeting a pipedream. Even if you work like crazy one month, the next month could bring a dry spell and all that hard income you pocketed away quickly gets reabsorbed into keeping you afloat.
While unpredictable income is not something that will ever go away, here are four things you can do to better cope with the highs and lows:
1) Keep your personal & business finances separate
Any accountant will tell you that maintaining a separate bank account for your personal expenses (checking and savings) and business finances is essential. Not only does it make record keeping and tax preparation a lot easier, it also helps you manage and arrange your finances (also known as budgeting).
If you have an online accounting system in place, you can also synch your business bank account with it and automatically import and track expense transactions. This provides a dashboard view of your cash flow. If you work with a tax preparer or CPA, it will also make getting them the reports they need a lot easier.
2) Draw a salary
Once you have your business account set up, make a habit of drawing funds from it on a scheduled basis, much like claiming a salary. Perhaps once a week or twice a month, transfer funds into your checking account to pay your personal bills.
How much you draw depends on your household budget, but a good rule of thumb is to calculate the bare minimum amount you need to pay off your personal expenses and other non-business obligations (like health insurance). This bare minimum should be your baseline salary.
While there may be times when you need to draw more out of your business bank account to pay for vacations and other expenditures, try to maintain a consistent schedule and salary amount. This will help avoid the temptation to be frivolous when times are more prosperous.
3) Set money aside for lean months
If you do land a windfall client, set aside the money in your savings account (not your personal checking account) so that you can draw on those funds to help tide you over (and alleviate stress) during lean months.
In this setup, you will pay your bills from your personal checking account, deposit payments from clients into your business account and use a separate savings account to deposit whatever is left over after you have paid yourself a salary.
4) Get an idea of your trending income
Predicting cash flow is not easy when you do not know where your next client or project is coming from. However, historical analysis should give you some idea of what your average income is over 12-24 months and give you a better sense of the levels of income that you need to maintain moving forward.
If your baseline income tracks lower than your personal budget, consider cutting expenses or finding new business.
Taking the time to gain insight into your expenses, understanding your income target and drawing a salary accordingly can make your finances a lot more sustainable. It is a simple model—but it works.
Caron Beesley is a small business owner, a writer and marketing communications consultant. Caron has worked with organizations including the Small Business Administration (SBA.gov) and private companies to promote essential resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley