Balancing unreliable income

One of the biggest changes to adapt to when we quit our jobs to become entrepreneurs is the potential inconsistency in income. As an employee, you get your weekly or monthly salary. And while variable parts may impact the exact amount, the overall range is quite fixed. Which means that you know exactly how much money you have to pay your bills. Even bonuses are usually paid at a set time of the year, so they don’t come as a surprise.

As an entrepreneur, though, it is pretty normal to deal with a varying cash flow. Depending on your business model, the variation may be smaller or bigger. But you will have to solve the problem that you have to pay your living before you can say exactly how much profit your business made this year.

Not only entrepreneurship comes with unreliable cash flow. Many women are used to balancing e.g. unreliable child support, varying working hours, or multiple income streams. Unfortunately, those women are often caught in a feast or famine cycle. When money comes in, they spend it on open bills and some treats. Then come a few tight months. Bills are not paid on time, causing late fees to accumulate. You may even get into debt to make do. And when the next bigger sum arrives, you pay your bills, late fees, debts, and start all over.

It’s a skill, but you can use it better

There may be a time in your life where this is how it goes. But as an entrepreneur, this is not what you signed up for when you plugged up the courage to create your own business. So, we need a strategy to get out of this cycle as soon as possible.

People usually believe that things will change when they make more money. But what happens often enough? The windfall becomes bigger, the treat you allow yourself to buy becomes bigger, maybe you get a new credit card. The rates for your credits become bigger, and a few tighter months bring you right back into having no money left for your day-to-day living. Many people who learned to live like that are constantly one tax bill away from bankruptcy. It may sound counter-intuitive, but it’s actually way easier to learn good money behaviour when you don’t have that much. Simply because your options are more limited.

But whether you can already live off of your business or not, whether you deal with multiple income streams or just one, the strategies to balance unreliable – or better: inconsistent income are similar. The most challenging situation is when you don’t have any idea yet about how much income your business generates, e.g. because you just started out.

What is income from your business?

It may seem obvious, but the income from your business is the profit your business makes within a specific time frame. For the sake of this post, let’s assume a year. Let’s also assume that you’re the sole owner.

The income from your business is NOT: What your customer or client pays you. Especially freelancers who are just starting out sometimes don’t pay attention to the difference between turnover and profit. You may assume that your costs of doing business are so small they don’t count anyways. You have no corporation, so all taxes are personal taxes etc. etc. But whenever we start doing the maths clients are surprised how much lower their profit is than they thought. One of the main reasons is that they don’t consider business costs as costs of doing business, but that’s a topic for another post.

So, the first thing you need to do is to calculate the profit your business makes within a year. That’s fairly easy; money in – money out = profit. As soon as your business finances become more sophisticated than that and you are not qualified to do your own bookkeeping, outsource it! If you don’t know what depreciations are, outsource your bookkeeping and taxes.

The profit of your business after corporate taxes (if applicable) is your personal income. Hence, you’ll pay taxes on it, and only what’s left after taxes can you use for your personal spending. Check back with your advisor or accountant if you need help calculating your personal budget.

Why is my income inconsistent in the first place?

In business, not all months are created equal. Depending on your products, services, business model, and marketing cycles, it is perfectly normal to have more turnover in one month and less in another. E.g., when you sell handmade Christmas decorations, your main income is in the months leading up to Christmas. If you’re a fitness trainer, you might sell the biggest share of your courses right after Christmas, when the festive eating turns into New Year’s resolutions, and have another high season when summer is approaching.

Maybe you launch one course a year, but that one launch provides enough money to last for 12 months. Or you’re a freelancer who gets paid for work done but would still like to have a 2 months’ vacation per year. Maybe you are an investor, and receive dividends once a year.

You can even out some of the bumps in sales by diversifying your product range, enhancing your business model or adapting your marketing strategy. But some degree of variation will persist.

Plus, also your costs are not spread evenly throughout the year. For many digital services and insurance policies you may have chosen the annual plan because it’s the cheapest. The Christmas decorator may sell in the second half of the year, but they create in the first half. Hence, costs of material increase when turnover is slow. This leads to high variation in monthly profits, which is why we use the annual profit as our performance indicator.

What if I’m only starting out and don’t know how much money I will make?

The longer you are in business, the more reliable are your numbers, and the easier is it to predict turnover, costs, and variation. But even if this is your first year in business, set a sales goal and calculate the expected costs. You won’t hit your exact target. Chances are, you sell more than you expected and that your costs are also higher because you didn’t know that you need an insurance policy for whatever to get this big client. That’s normal. You’ll learn, your plans will become better. That’s no reason not to start planning now.

Just one tip: Don’t be too optimistic when planning what amount to take for private use. It’s better to start slow and get a bonus if your profit was higher than you expected, than to spend all your money for a new (private) car and then be surprised by your tax bill.

What’s next?

Split your annual profit after taxes by 12, and you get your monthly income.

I suggest deducting a contingency margin and not take all the money you possibly can out of your business during the course of the year. Of course you should take enough money to pay your living and feel like it’s worth it to be self-employed (if you’re already there with your business!). But you should not jeopardise the liquidity of your business for your summer vacation.

Send the monthly allowance to your private account and spend or save it according to your personal budgets.

How about multiple income streams?

When we talk about multiple income streams we don’t mean different products in your business, such as income from online courses, personal training and selling equipment. With multiple income streams we mean income from more than one business. This may include profit from another business, or salary from your part-time job, dividends from investments, royalties from a book, child support, rent from your roommate etc.

Monthly payments such as salary or child support can help you dealing with the other, more inconsistent income streams from your business or other investments. But while they might allow you to take less money out of your business on a monthly basis, which might be beneficial for the liquidity of your business, they don’t change the overall strategy.

Treat all income streams individually, but the same: Add up the annual amount, calculate taxes and deduct them, then split amount in 12 instalments and pay yourself on a monthly basis. Or switch to 52 weekly rates if that serves you better. When calculating your tax, however, consider that your tax rate may be based on your total income, not just the type of income you currently look at.

What if I don’t make enough money?

Sometimes we calculate the annual profit, assess it against the costs of living and find that the business doesn’t make enough. Or the monthly instalment is too big to pay out during the first, tight months of the year. Those are two different problems which can be fixed similarly. Situation A means your business isn’t profitable enough, while situation B means it’s profitable but your financial overhaul starts in slow months.

Both problems require that you re-assess your costs of living. Try to eliminate what’s not necessary so you can survive the first months. Maybe you can talk to some providers and ask for a deferment of payment into the stronger months. Only do so if you’re confident that the stronger month is around and you know why (e.g. you know your seasonal variation in sales, not just hope for magical growth).

If you’re currently in a limited period of slow business, you can also consider taking on a loan to bridge the gap. Again, try to avoid going into debt if the problem is not normal variation but deeper problems with your business. If the problem is your business, and not excessive lifestyle or seasons, solve the problem!

Profitability vs. liquidity

I rarely see businesses which are indeed not profitable. Most business ideas are valid and have potential, but are executed poorly or suffer from bad market fit. Many entrepreneurs fail within the first two years, but not because the business cannot be profitable in the long run, but because they lack liquidity in the short term. It takes roughly two years to establish a business, often longer. If you want your business to grow, you need to re-invest some of the money, which takes from your personal income. Chances are that you need additional sources of income or live off your savings for a while. So make sure you have that.

But also be honest with yourself. If you’ve been funding your side-line business with your part-time salary for 10 years now, you don’t have a business. You have an expensive hobby.


What are your questions when it comes to dealing with inconsistent income from your business? What are the challenges it causes in your personal life? We are here to help you eliminating drama out of your life and business. So please feel free to share how we can help you in the comments. Or book your free discovery call to discuss our coaching and consulting options.


Photo by Gustavo Torres on Unsplash

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