One of the most difficult facets of being a small business is dealing with income that is highly variable. It is also one of the most stressful aspects of being an entrepreneur. The lack of regular paychecks makes it nearly impossible to predict cash flow and establish a budget. Even a surplus from a fruitful month can be quickly used up keeping the business afloat if the next month or months bring a dry spell. While entrepreneurs and small businesses will likely always have to deal with fluctuating income, there are things a business owner can do to better cope with the highs and lows.
KEEP PERSONAL AND BUSINESS FINANCES SEPARATE
Maintaining separate checking and savings accounts for personal expenses and not co-mingling them with business finances is essential. It makes record-keeping, tax preparation and budgeting easier.
Businesses with an online accounting system should sync their business bank account with it and automatically import and track expense transactions. Doing that will provide a snapshot of the business’s cash flow and will make it easier to provide the business’s tax preparer or CPA with the reports they need.
PAY YOURSELF FIRST
Business owners or entrepreneurs should establish a salary for themselves and draw funds from their business account on a regular basis. Whether once a week, every two weeks or once a month, you should transfer funds into your personal checking account to pay your personal bills.
The amount of those draws depends on the household budget, but experts advise calculating the absolute minimum amount needed to meet personal expenses and other non-business obligations like health insurance. That amount should be the baseline salary.
While there may be times when owners need to draw more out of their business bank account to pay for vacations and other expenditures, maintaining a consistent schedule and salary amount will help avoid the temptation to be frivolous when times are more prosperous.
SET MONEY ASIDE FOR LEAN MONTHS
Whether you land a big account or have a banner month, set aside the unexpected windfall in your business savings account, NOT your personal checking account, to provide a source of funds to make up the shortfalls that come during lean months.
By using this arrangement, 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’s left over after you’ve paid yourself a salary.
GET AN IDEA OF YOUR TRENDING INCOME
While predicting cash flow is never easy, historical analysis should give you some idea of what your average income is over 12-24 months, as well as provide a better sense of the income needed to maintain forward momentum. If your baseline income tracks lower than your personal budget, consider cutting expenses or finding new business.
Understanding your income target and drawing a salary accordingly can make your finances easier to manage. It is a simple model, but it works.
For more information on growing your business and managing your cash flow, contact the Economic Development Collaborative-Ventura County. Conveniently located in Camarillo, California, we’re here to help.