Managing a business’s finances is crucial to responsibly avoid the potential pitfalls of irregular income. Make an actionable plan for controlling monthly expenses and opt for the right methods to mitigate financial risks. Here are some ways to stabilize business finances with irregular income.
Account All Your Expenses
First, determine your business’s fixed costs. As the name implies, these expenditures remain constant in terms of the amount monthly, such as rent, utility, insurance, or debt. In other words, even if your new revenues grind to a halt, fixed expenses stay the same. Hence, be sure you know your average fixed costs and set that amount aside to keep you in business.
Unlike fixed costs, the variable expenses fluctuate, such as your bills for air conditioning, heat, electricity, and water. Therefore, it’s best to approximate these costs based on historical data, the time of year, and your consumption. Note that variable expenses will inevitably grow as your business grows.
Accounting for both your fixed and variable costs ensures that you can fulfil all your financial obligations, especially if your income is irregular. For fixed costs, make a simple spreadsheet of these expenses to help you understand your baseline. Conversely, for variable costs, expect to spend on the higher end of your estimate but conceivably spend less.
Set a Realistic Budget
After accounting for all expenses, set a realistic budget. Most small business owners tend to experience irregular income, especially if the line of business is seasonal. Hence, it’s necessary to identify your business’s bottom line and plan a budget accordingly.
If you’re unsure how to budget with irregular income, take the average of your past three monthly incomes, then make a budget around that round figure. Afterwards, add all essential costs and consider it the bare minimum you need to earn. At first, it could be your monthly revenue goal, but try to increase it over time as your business grows.
Another tip is to set a budget based on your lowest monthly income. Make sure your budget can cover all your fixed and variable costs. If you’ve been running your business for a long time, add all costs you had coming in over the previous year, then divide it by 12. The result will be your last year’s average monthly income.
Use it as a base mark for your income. Moreover, if you have a good month, try adjusting your budget higher.
Build an Emergency Fund
Try to save and build up an emergency fund. It’s meant to get you through lean times or emergencies. Ideally, it should be worth at least three months of your essential outgoings. However, not everyone can realistically achieve this. Alternatively, start with saving your entire month’s income. This amount can already be a cushion to protect you against immediate income shocks.
A good way to get started is to treat your emergency funds like a monthly bill. Do this as a persistent, cumulative action, and progress will show over time. Additionally, it’s best to save emergency funds in a separate account. It should be easy to access since emergencies, by definition, require immediate actions.
Devise a Contingency Plan
Several unexpected situations can affect your bottom line, from a natural disaster power outage to a disease outbreak. Emergency funds can help you during these rainy days. However, these events can exhaust your cash reserve in the worst cases. That’s why it’s crucial to have contingency plans in place for such situations.
As mentioned earlier, most emergencies are time-sensitive. Aside from emergency funds, the sources of funds that you can easily access are your savings. Your friends and family can also tide you over. If they can’t, opt for short-term business loans from alternative lenders. They disburse funds within a short time frame but usually have high-interest rates. On the contrary, consider taking out a bank loan if you don’t need capital quickly.
Cross-selling isn’t only an effective marketing strategy but also a great way to stabilize your business’ income. It happens when you offer products or services that’ll complement those chosen by your customers. If you successfully cross-sell, it offers high pay-offs, which means an increase in your revenue. As a result, your income stabilizes.
The key to successful cross-selling can be summed up into three steps – Segment your customers so you can correctly interpret their purchase decisions. Offer relevant value-added suggestions, and make sure to time your sales pitches appropriately.
Financial preparedness is a must if your company experiences irregular income due to periodic payment of clients or the seasonality of your industry. Emergencies are inevitable, but with forethought, you can set your company apart from countless collapsing businesses due to poor financial planning.