Managing cash flow is hard enough when your income is regular. Now add in the complexity of being a soloprenuer with irregular income, and you can see how that would be difficult.
I currently work with some people who make 75% of their revenue in just 2 months a year. This irregularity creates complexity within your cash flow.
In this blog post, I am going to teach you how to manage your cash flow as a soloprenuer so it feels more regular!
Step 1: Figure out your monthly expenses
It is hard to know what to pay yourself if you do not know how much you need. Obviously, early on in your business it may be hard to pay yourself enough to cover your expenses. If this is the case for you, you have no choice to live off of your savings. This blog post is for people who are a little farther along than that and have enough revenue.
Step 2: Determine the regular monthly salary you need
If you are spending $10,000 a month, you need to being paying yourself at least that post tax. A general rule of thumb (not perfect), is to save about 30% towards taxes. So to get yourself to $10,000 post tax, you would need to pay yourself around right around $14,000 a month.
Remember, this is after expenses too. If you bring in $20,000 a month and have $6,000 of expenses, then you are left with the $14,000 you need. Make sure you are saving for taxes, this is not something you want to get behind on!
Step 3: Set up an owners pay account
Your next step is to setup an owners pay account. The goal of this account is to get built up so you can always pay yourself a salary. Let’s say this month you bring in $30,000, you do not want to pay yourself all that. You will pay the $6,000 of expenses and then pay yourself the $14,000 (and save about $4,000 for taxes). Then the remaining $10,000 will get put into your owners pay account. So then next month when you only bring in $10,000, you will be able to cover your expenses and still pay yourself what you need because you threw extra income into that owners pay account.
This is huge! This will help you feel like you have a salary, and it will make managing your monthly cash flow that much easier.
If this owners account ends up starting to get pretty large, you can pay yourself more and it will feel like a nice bonus.
Obviously this is a pretty simple example. You may need to carve out some to build an emergency fund or to save for some big expenses for the business. And if that is the case, then make sure you do just that.
Step 4: Reassess Your Income
Every 3, 6, or 12 months revisit your numbers and see if you should be paying yourself more, less, or the same. Hopefully the business is growing and you can pay yourself more, but you have to check back in and ensure the numbers are correct periodically.
This structure will help make your irregular income feel more regular. You basically are making yourself the bank and supplementing your income on the months you’re short, but then on the months you make a lot, you build up the payment account for the future. I believe this is crucial to your financial success. I have seen firsthand too many business owners who just spend their entire profit every time they receive it, then in months they are short they can’t do anything they want, let alone save, because they don’t have the money.
Implement this today! You will be happy.