Running your own business often means income isn’t steady, so it can be difficult to plan financially. Learning to handle unpredictable cash flow will help you avoid the financial roller coaster.
When you don’t bring in a specific amount every month, it can be very difficult to plan ahead. Many businesses face the issue of unpredictable cash flow in the early months or even the first year and those who freelance will have the same problem. It’s impossible to predict how much will come in and some months, you may not even break even. So, how can you manage your income to ensure a sudden emergency won’t bankrupt the company?
There are several steps to avoiding potential problems.
- Identify potential cash flow issues.
- Correct leaks.
- Build up a buffer account.
- Track all income and expenses.
- Create a reasonable budget and stick to it.
Nearly every business faces cash flow issues at some point and the best way to prevent some of the biggest problems is to simply not spend money. Don’t hire more people than you need in the beginning. Do more yourself or outsource each job individually as needed and wait to add fixed expenses (such as an employee) to the budget until there is always enough money coming in to cover it.
You will also need to carefully evaluate any purchases that could set you back. Ask yourself if the purchase will help the business earn money. If not, then it’s probably not worth buying at this particular moment and should be relegated to the list of things to purchase later, when more money is coming in.
Avoid debt wherever possible, as this can end up costing far more in the long run with interest rates. That being said, it can be good to have a business credit card for some uses, but be sure you’ll be able to pay it off on time to avoid the higher interest rates.
Most people have a savings account and an emergency fund, something that your business should also have. It’s not a matter of if your business will face a crisis, but when, so you need to be prepared. The backup fund will also be useful if you have a very slow month and end up with too little to pay the rent.
How do you build up an emergency fund? The first step is to create a budget and then anything that comes in over the basic costs should be saved. Don’t be tempted to spend it on something that isn’t absolutely necessary for the business, but save it instead. Once you have a few months of backup funds in place, it’s possible to use some of the extra cash for other purchases, such as office equipment, marketing, etc. If anything happens, you’ll already have the money in the bank to deal with it.
It can also be helpful to have a separate bank account to store the emergency fund in so you won’t accidentally spend it on something else. The idea is to save it for a real emergency and avoid temptation, which is difficult if the money is in the regular business account.
Budgeting Unpredictable Cash
One of the biggest issues when trying to manage money in a business situation is paying the necessary bills and wages. Ideally, your costs should be kept as low as possible, but in many cases it’s impossible to go without any employees and overhead is always there. In order to ensure that you can pay your employees, you’ll need to plan ahead.
It’s hard to budget money that you aren’t sure will come in, but the best way to go about it is to write down all your fixed expenses. These should include:
- Product costs
- Other fixed costs
These are the things you know exactly how much they are and they will be the first things to be paid off. You will also need to prioritize them. For example, paying your employees and the rent are pretty high on the priority list, so make sure these are going to be covered first.
The next step it so make sure that your money is going into each area according to priority. For example, if rent is first on your list and costs $800, the first $800 made will go toward rent. If wages are $900 and you bring in a $1,200 sale, then the first $800 would go toward rent and the remaining $400 into wages. The next income would round out the wages.
Possibly the easiest way to keep track of this is to have a spreadsheet set up with the budget and every time you deposit money into the bank, you would fill in the spreadsheet accordingly. When it comes to personal budgeting, you can use envelopes for each item and cash.
Of course, not all expenses are fixed. You may have expenses that change on a monthly basis, but in most cases, you can act to reduce these if need be. When there isn’t enough money coming in to pay for more than the fixed expenses, you’ll want to be sure that you reduce any other expenses as much as possible. Anything extra should go into savings.
It can be a real challenge to stay on top of an unpredictable income, but with some careful planning and an adjusted budget, it’s possible to make it work.