One of the biggest challenges to tackle as an entrepreneur is seasonality. Many industries have both high-activity and low-activity periods throughout the year. Failing to plan for income fluctuations can wreak havoc on your finances, but with a little bit of forethought you can avoid those disasters. No special talent is required—just good, old-fashioned budgeting and discipline!
List your expected expenses for a year
The first step in planning for inconsistent income as an entrepreneur is to list all your expected business expenses over the course of a year. Whether this is a calendar year from January through December or some other twelve-month period is entirely up to you. Just do whatever makes sense and is easiest.
Of course, listing your annual expenses is easier said than done. If you have already been in business for a while, this will be easier, but if not, you can still get a fairly good idea from market research and speaking with mentors.
The big-ticket items will come easily, but really drill down here. If you have a $6 monthly charge for Google Workspace, list that. If you pay $35 once a year for a license renewal, list that as well. Be sure to also include required payroll or distributions for yourself to meet your personal expenses and achieve your goals (after decreasing costs so you can live a cost-effective lifestyle!). You also need to account for required federal and state tax payments, business license renewals, retirement contributions, professional education, office supplies, industrial gear, and whatever else applies to your business. Finally, account for a CapEx (capital expenditures) budget, where you set aside funds in a dedicated account to pay for expenses that arise sporadically and/or less than annually.
Some of your expenses will be fixed. For example, you will know the cost of a particular software subscription; you might also reasonably expect that cost to increase by 10% each year. Other expenses will be variable. These are often expressed as a percentage of revenue, or perhaps your electric bill is simply higher during certain months. Most businesses will have a combination of the two. A restaurateur might have a largely fixed payroll, but the cost of food sold will be a consistent percentage of sales throughout the year even though some seasons are much busier. Where you are not sure, give yourself some wiggle room by estimating a little bit high.
One last point: Unless you have a crystal ball to see into the future—if so, contact me so we can place some bets on the World Series!—be sure to give yourself an extra “whiskey tango foxtrot” allowance in your budget for unexpected expenses, because they will happen.
Calendar your expenses
The second step is to calendar your expenses on a month-to-month basis. I use calendar here as a verb, but it may help to use it as a noun as well by physically printing out calendars for each month or using a digital equivalent such as a spreadsheet.
You might even calendar your expenses at the same time you are listing them. Some expenses, like your Internet bill, arrive on a fixed schedule each month. Other expenses, like your annual Mint Mobile renewal, may arise only once a year but you know when they will come due. By listing when you will need to pay each expense, you will know what your required outlays are for every month of the year.
Calendar your income
The next step is to calendar your income, also on a month-to-month basis. This works just like listing and calendaring your expenses, but for revenues instead—although admittedly can be harder to pin down and will involve more guesswork. Your revenue stream is going to be highly specific to your industry, so there is not much to say here beyond some general tips.
Be realistic here about how much income to expect, and when it will arrive. Also consider collection delays. If you know that you earn most of your money in July, but the payments do not arrive until August, do not count on being able to spend that money until September.
Importantly, err on the side of caution. For expenses this meant estimating high. For revenue, the converse is true: Estimate a bit low to give yourself some wiggle room.
Ideally your income will be much higher than your expenses. That is a good problem to have, and we can talk about how to make your surplus work for you! If your expected income may not meet your expenses, though—which is very common for new businesses before they gain a solid footing—be sure to have a plan for covering the shortfall, and include this in your budget.
Matching income and expenses
So far, we have been discussing what amounts to basic budgeting. Once you complete those steps, matching your income and expenses is the tricky part. The idea here is to stockpile enough money during the plentiful seasons to be able to meet your expenses during the lean times.
If your income will exceed your expenses each and every month, you can stop here. But most “seasonal” businesses do not have this luxury.
Start by identifying your infrequent, big-ticket items—your annual dues and subscription renewals, quarterly tax payments, business trip to Hawaii, etc. By taking these “abnormal expenses” out of the equation, you remove the bumps in the road, and your remaining expenses should be roughly consistent throughout the year.
Hopefully, outside of your busy season you can cover all your “normal” expenses each month. If not, add the shortfall to your abnormal expenses. (If you only bring in $2000 each month out of your busy season, but your normal monthly expenses are $2500, you have an extra $500 in abnormal expenses beyond the ones you already identified.)
Add up the cost of your abnormal expenses for one year. Aim to have this amount set aside in a dedicated high-yield savings account by the end of your busy season each year. That way, you are ready for the year ahead.
How and when you accumulate your abnormal expenses fund will naturally vary according to the timing of your expected income.
At one end of the spectrum, you simply divide your total abnormal expenses by twelve. This gives you a monthly abnormal expenses amount. Then, you add this monthly abnormal expenses amount back into your monthly budget to replace all the abnormal items.
Example: Assume you expect to incur $9,000 in abnormal expenses over the course of the year. This equates to $750 per month. You schedule $750 to be automatically transferred each month into your abnormal expenses fund, i.e., your high-yield savings account dedicated to covering your abnormal expenses. When an abnormal expense arrives, you transfer the amount needed to cover that expense from your abnormal expense fund into your checking account.
At the other end of the spectrum, your regular monthly abnormal expenses amount is zero. You earn enough during your busy season that you set aside the entire amount needed to cover your annual abnormal expenses. Divide your total annual abnormal expenses amount by the number of months in your busy season. This gives you a busy-season monthly abnormal expenses amount. You add this busy-season amount back into your monthly budget, just like above, but for your busy months only.
Example: Assume the same $9,000 in abnormal expenses for the year, your busy season is July and August, and you collect that money in those same months so it is available to spend in August and September. In each of August and September, you will transfer $4,500 ($9,000 ÷ 2) into your abnormal expenses fund. You now have enough set aside to cover your abnormal expenses from October through the following September.
Most businesses will probably fall somewhere in between. You can accumulate a large portion, perhaps even most, of your total annual abnormal expenses during your busy season. The amount you can cover during your busy season becomes your busy-season amount as outlined above. The shortfall then gets divided by twelve and becomes your regular monthly amount. During the busy season, then, you have both your regular amount and your busy-season amount.
Example: Assume the same $9,000 in abnormal expenses and two-month busy season, but you can only save $6,000 towards your annual expenses during the busy season. In both August and September, you transfer $3,000 ($6,000 ÷ 2) into your abnormal expenses fund. You need to cover the remaining $3,000 ($9,000 – $6,000) over the course of the entire year. You schedule $250 ($3,000 ÷ 12) to be automatically transferred each month into your abnormal expenses fund. (In August and September, you transfer both the $250 regular amount plus the $3,000 busy-season amount.)
Be willing to adjust
The final step in planning for inconsistent income as an entrepreneur is to be flexible. Review your plan periodically to ensure it is working for you, and be willing to revise it as necessary.
All these numbers flying around may make your head spin. Rest assured that you can plan for inconsistent income if you just take it one step at a time. I am also available for consultations to help you set up a personalized plan for your business, so please reach out for assistance!
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