Ahh, to be self-employed or run a small business – the freedom, the mental stimulation, the crushing anxiety, and the chaotic cash flow. For some, money coming into the business coffers is either feast or famine. How do you get a grip on your business finances when client payments don’t follow a predictable schedule?
Know your Fixed Expenses
Do you know how much money your business needs to pay the monthly fixed expenses? For example, what’s the total of rent, insurance, software subscriptions, payroll, and other expenses that are more or less consistent and paid monthly? What is the total in dollars and cents?
Knowing the monthly fixed expenses is important since it forms the basis of the following two tactics.
Keep a Cash Cushion
The best antidote to inconsistent income is a cash cushion equalling a month’s worth of fixed expenses. This ensures that your business can pay the fixed expenses next month regardless of the timing of client payments. And if you have to dip into this cushion, build it back up as soon as possible.
However, if your business’ income is seasonal, you may need to keep more cash to cover expenses until the next busy month. For example, business is slow in the summer, so there is three months’ worth of fixed expenses in cash until the September payments start rolling in.
Monitor and Prioritize
However, a cash cushion is hard to accomplish for some, especially in the early days of a new business. Those heady times when money going into the bank account and the money going out don’t often match. In these situations, you’ll need to monitor those transactions closely. A weekly review of the expenses coming due in the next seven days is necessary to ensure there’s enough to cover these bills.
If there isn’t, what is paid first? Who’s most likely to cut off services if a payment is late? Who’s less likely to provide a grace period after the due date?
Yeah, this is a lot of work, but it’s the nature of the beast for many businesses. That’s why financial organizers like me get paid the big bucks.