Starting a new business can be challenging. When you work as an employee, allocating your money is much easier since you have a regular paycheck or predictable income. However, as a startup owner, your income is more likely variable and largely depends on how well your business performs.
An inconsistent income stream is typical in small businesses, especially when starting. Several factors, such as seasonality and irregular client payments, may contribute to this. Regardless, preparation is paramount for potential fluctuations in your startup’s cash flow.
To help you get started, we’ve put together the tips below when dealing with income irregularities in your startup.
Establish a Budget for Irregular Income
Establishing a budget that accounts for unpredictable income will help your business achieve better results. Generally, incorporating some flexibility into it is an excellent start to prepare for variations in your startup’s revenue. Doing so will give you more control over your varying monthly income.
However, creating an irregular income budget requires a more deliberate approach. It will involve taking into account your company’s income and expenses, which are your ultimate basis for effective budgeting.
With a clear picture of the amount of money coming in and out of your business, you have a better chance of building a budget that aligns with your long-term objectives and accounts for income variations. Remember that it’s not a one-and-done activity. As your startup moves forward, you must review its financial statements and adjust as required.
Understand All Your Business Expenses
While this may appear counterintuitive, knowing your anticipated costs and expenses is crucial, particularly in the startup phase. It will allow you to set a more realistic budget and strategically allocate limited resources. Below are the main expenses you need to factor into your startup.
Despite irregular income, there are certain expenses your business must pay every month. Typical examples may include insurance, loan repayments, utility bills, and rent or mortgage. Since these expenses are non-negotiable and critical for your startup operation, set aside these amounts first.
Some expenses in your startup may recur monthly, but their actual amounts can vary. Depending on your type of business, variable expenses may comprise inventory, shipping, and packaging costs.
These costs may change depending on how much your startup produces or sells. You may find it beneficial to calculate them as a percentage of your net revenues. Historical data on these expenses may also help you get a better estimate.
With irregular income, you would not want to spend your startup’s limited resources on non-essential spending.
For instance, spending on the latest equipment may benefit established companies and specific industries. However, such investments are impractical if you’re dealing with unpredictable revenue in your startup.
Eliminating discretionary expenses can help your company stay afloat despite income irregularities. However, it’s worth noting that they’re not ultimately unnecessary. Most discretionary costs can be reduced or eliminated in the short term.
For instance, your startup may survive without training or marketing for a month. But you should remember that they are also beneficial for the long-term growth of your business.
Determine Your Monthly Average Income
Determining your monthly average income is the most critical aspect of managing your company’s finances on an irregular income. It can be challenging to estimate your monthly income accurately. However, getting the most accurate estimation possible is crucial.
When doing so, it’s best to be more cautious and project low. This way, you can be more financially prepared for variations in your business’s average income. Consider any changes or activities that will affect your company’s bottom line.
Pay Yourself Appropriately
It’s also a good idea to pay yourself appropriately. It’s probably the last thing you have in mind when dealing with irregularities in your business income. But this will help you facilitate structure and consistency in money management.
Additionally, compensating yourself based on a realistic budget can give a sense of personal income stability despite fluctuations in your business income. You can also use the fixed paycheck as a cushion when your startup income is lower.
Have a Business Emergency Fund
A dedicated emergency fund for your startup is essential, especially when struggling with irregular income. Many unexpected things can happen in your business, such as natural disasters, medical emergencies, etc.
Without an emergency fund and stable business income, it will be a lot more challenging to ensure the long-term viability of your startup. By having a separate fund for these emergencies and income fluctuations, you can better protect your new business financially.
Be Proactive in Managing Your Startup’s Finances
Irregular income may seem disadvantageous for your business. But with a proactive approach, you can use it as an opportunity to practice discipline and make progress in your company’s financial health. Note that there’s no fixed way to set a budget for income irregularities.
The method that suits your startup may differ from established and new businesses. Hence, don’t be afraid to try the approaches you think will align with your startup and modify them as necessary. Likewise, it won’t hurt to seek financial advice from a professional.