Updated: Mar 25, 2020
When you start a small business for the first time, you'll quickly realise that cash flow isn't always as predictable as you'd like it to be. When you're employed in a conventional job, you usually receive the same income every month, no matter how well the larger business is doing. However, when you're running your own company, your income will fluctuate according to the performance of the company and how much profit you're making.
Almost every small business will experience periods of feast and famine during the year. Usually, these issues are caused by seasonality for many companies. For instance, you're more likely to get more business as an accountant during tax season.
Fortunately, there are a few things you can do to improve your chances of thriving in an unpredictable monthly income.
1. Know Your Bare Necessities Budget
The first thing you need to survive in a feast or famine environment, is an understanding of your cash flow. Take some time to look at your incoming cash and outgoing expenses and figure out how much money you're going to need to keep your company running. Think about:
· Hiring costs and employee benefits
· Taxes and legal fees
· The cost of real estate for your business
· Business broadband and phonelines
· Insurance for your company
You may also want to include a little cash into your budget each month for your "variable" expenses. These are the costs that can change over the course of the year, such as the price of your marketing campaigns.
2. Keep the Big Picture in Mind
Once you understand your incoming and outgoing costs, it's time to think about how you're going to make the most of your entire business year. Rather than just planning to use the money that you get each month in a different way, think about how you can split your expenses up over the course of your twelve-month financial year.
For instance, if you know that you have a down period during November and December, you should be looking for ways to save extra money back during your busy months, so you don't struggle with your cash flow. Don't make the mistake of thinking that you can take each month as it comes.
3. Stick to Your Budget During Busy Season
Just as you'll have dry periods in your business when it feels like you're not making any money you'll also have times when you're earning a lot more than you expected. This is your busy season. When your sales are in full swing, it can be tempting to give yourself bonus payments or plow more money back into your company so you can take advantage of new opportunities.
However, it's important not to go too crazy when you're earning extra cash. Think frugally and consider how you can stick to your budget as closely as possible. Once you've got enough money put away for both your emergency savings and your down periods, then you can think about looking for new ways to invest in your company. A bookkeeper or financial professional will be able to help if you're not sure when to spend and when to save.
4. Be Rational During your Slow Seasons
Being rational during your slow seasons doesn't just mean spending less if you haven't got as much money to work with. You're also going to need to figure out when you need to take out a new business loan or borrow some capital from someone like HappyPenguin so you can continue to take advantage of opportunities to grow your business. Ultimately, you still need to spend money to make money - even when your incoming cash is limited.
The key to success with spending during your slow season is make sure that you consider the return on investment for everything you spend as carefully as possible.
5. Build Flexibility into your Budget
Finally, although it's essential to have rules to follow when it comes to managing your business spending, it's also a good idea to leave some flexibility in your budget, just-in-case. This can be particularly important when you're planning for seasonal changes in your earnings. Make sure that you always have enough cash to meet with your baseline budget, but don't be afraid to make changes from time to time if you need to.
Sometimes, this will mean saving more than you expected in months where you earn extra. It may also mean investing in a business loan during difficult times too. The more time you spend running your business, the easier it will be to cope with the swings and troughs.