This is the first of the "Monday Money with Danetha Doe" guest series. Danetha provides accounting services and works with software developers to help make accounting easier for its users. To kick off the series, Danetha covers how small business owners can manage their cash flow during times of income fluctuation. Read on...
One of the hardest things about being in business for yourself is dealing with the highs and lows of income fluctuation and the resulting cash flow challenges. Not only is this roller coaster mentally and emotionally taxing, but it also makes business decisions—from which bills to pay to growth strategies—incredibly difficult.
When it comes to planning your cash flow, it's all about having an idea of how much money you expect to bring in and how much you expect to send out. The longer you're in business, the more accurate this plan will be because you'll have a steady clientele base and you'll know which expenses are necessary to keep the business running and which expenses are needed to keep it growing.
But how do you budget and create a plan for your cash when you're new to business and have absolutely no idea how much you'll earn from month to month?
Start with your fixed expenses. This is your benchmark or the bare minimum you need to bring in so that your business can keep running. With that total, you can calculate how many services or products you need to sell and at what price. (Learn more about break even analysis.)
Once you've figured out your fixed expenses, take a look at your contracts or invoicing agreements. Specifically, you'll wan to think of your payment terms (i.e., "net 30," "net 15," "due upon receipt," etc.) as they relate to your fixed expenses and their relevant due dates. (Bonus tip: If possible, it is a good practice to establish contract terms that put money in your pocket as early as possible—even up front!)
Next, let's look at three ways to deal with income fluctuation...
- Determine how you want to schedule the output. If some of your bills have due dates that you can schedule, take advantage of that. Sure, something like rent isn't going to be that flexible, but your work cell phone bill might be.
- Think through your service pricing. Offering your services on a retainer basis can not only help you with immediate cash flow, but also with long-term forecasting.
- Make sure the majority of your offerings require at least a percentage payment upfront.
How else do you manage your cash flow against fluctuating income? Tell me on Twitter!
Danetha Doe is a financial growth consultant for small businesses, specializing in beauty and fashion. She works with clients to improve their cash flow and profit margins, so they can expand and achieve financial success. An accomplished speaker and writer, she has been featured on Huffington Post Live with Suze Orman, Mind Body Green, YFS Magazines, and other media for her business accomplishments and expertise in cloud accounting. Visit her site danethadoe.com for free business strategy advice and to learn more about her affordable services.