How to Budget with Unpredictable Income
Creating a budget is one of the most important things you can do for your business. But many people avoid it because they feel it’s too difficult to estimate their income (or expenses for that matter). They may also feel as though their budget has to be set in stone, with no room for error. If your income fluctuates, a budget is probably one of the most important tools needed in your arsenal.
5 Steps to Setting Up Your Budget
Irregular income means you should focus more on your predictable expenses. If income from your business fluctuates significantly from month to month, focus on these key tips:
1) Calculate the amount of your regular, monthly recurring expenses (usually overhead such as your salary, rent, utilities, insurance, phone/data, etc) to determine the minimum amount of cash flow needed each month (i.e. your baseline).
2) Review your income from the last 12 months and see if it was less than your baseline at any point during the previous year. EXAMPLE: You review last year and discover that your income was less than the baseline expenses in March, June and October and the differences totaled $2,000.
3) Create a “barebones” budget based on: projected expenses determined in #1 and projected income based on those same expenses.
4) Once you start using your new budget, any excess cash should be "reserved" to cover potential months that may have a shortfall. Using the example in #2, you would need to save at least $2,000 before deviating from your baseline budget.
5) Adjust the budget as needed to provide for items outside of the baseline necessities as your “reserves” increase throughout the year. Try to build up at least 3 months worth of cash reserves to cover basic operating expenses.
Two major take-aways: look for trends where you can and focus on controlling expenses. You can get also get a free infographic that lays out the steps here. Making active decisions on things you can control can make all the difference. You will likely exceed your own expectations!
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