In business, size matters, especially when it comes to maintaining consistent income and cash flow.
There's a difference between running a small business and owning a micro business. If you're a freelancer, independent contractor, sole proprietor, or your team consists of five employees or fewer, then you may fit the definition of a micro enterprise.
Micro businesses often start small and have the potential to grow, but scaling up may be difficult when your income is irregular. Paul Bromen, CEO of mattress review site UponaMattress.com, experienced that when launching his micro business.
"My cash was crunched when I first started," Bromen says.
“You incur expenses immediately, but it can take months for the first money to flow into the business.”
- Paul Bromen
CEO of UponAMattress.com
He drew on retirement savings and reduced his personal expenses to get through the early days when income from the business was sporadic. At one point, Bromen even took a small emergency loan from a family member to cover his business's tax obligations.
As his site grows and becomes less of a micro business and more of a small business, he's prioritizing the need for tools to help smooth income and cash flow. If you're facing a similar challenge, here are four things you can do to make income gaps easier to navigate.
1. Create a workable budget.
Any size business can benefit from having a balanced budget that tracks both income and expenses. With a micro business, where income may not always flow in steadily, there's some tweaking that's often required to make a budget that works.
To deal with irregular income and uneven cash flow, Bromen limits recurring expenses for his business, "preferring to go without or buy with cash when the money comes in."
Another effective tactic for micro business budgeting is to use a baseline income to cover spending. The baseline is the minimum amount that's needed to pay necessary expenses for the business, while providing an income that's also sufficient to cover your personal expenses. Adding up both sets of expenses can tell you where to set the baseline so you have a clear income goal each month.
But what if you have a shortage or surplus of income from one month to another? That's where step two becomes important.
2. Establish a savings cushion.
Emergency funds aren't just for your personal financial life; they also can be a boon for your micro business if an invoice goes unpaid or you incur an unexpected expense. Yet 41 percent of small business owners have no financial backup plan for those kinds of scenarios.
Jeff Neal owns, The Critter Depot, a micro business whose products are in big demand. He's an insect farmer, selling feeder insects and worms online to people who own lizards and other bug-eating reptiles as pets. His business is thriving but he occasionally experiences bouts of seasonality. Sales slow down in the winter, but he still has to pay his operating expenses and fund growth initiatives during that three-month period. This is where having access to savings proves vital.
"During the summer, spring, and fall, I put aside about 20 percent of revenues so I can keep the projects I'm working on alive," Neal says.
“These projects are important to give me a competitive edge against the other sellers.”
- Jeff Neal
Owner of The Critter Depot
Likewise, Bromen is steadily building a savings cushion, which he says has been a huge stress-reliever. When more income is flowing into your micro business, you can funnel some or all of the amount over your budget baseline into a savings fund. A business savings account allows you to earn interest on your money while maintaining liquidity. A business CD might be better suited to long-term savings.
Either way, you'll appreciate having extra money on hand during the leaner months.
3. Keep personal and business finances separate.
When you're the only person working in your business or you have a very small team, it's tempting to throw business and personal expenses into the same pot. This can be problematic, however, when it comes to monitoring your business cash flow and keeping track of deductible business expenses.
Neal has a business checking account where all the revenue from his micro business goes. He uses this account, along with a small business credit card, to pay his business expenses. This simplifies spending, and the credit card also pays him cash back on purchases, which he includes in his profit margin.
If you're not using business banking services, consider getting started with the basics at least: a business checking account and a business savings account. From there, you can research other banking tools that could make cash flow management easier.
4. Consider where business financing fits in.
Aside from the short-term loan he took for taxes, Bromen has yet to use financing for his micro business, and Neal is sticking with his business credit card to cover short-term spending needs. But, at some point, you might decide that a business loan or line of credit makes sense.
A revolving line of credit can offer flexibility, since you can draw against it as needed and you only pay interest on the amount of your credit line you're using. A term loan could be a source of working capital for the short term, or help you to fund larger-scale growth investments for the long term.
Two things you need to keep in mind when your micro business doesn't always have consistent income is whether you'll qualify for a loan and whether you're capable of making the payments on time each month. Sitting down with your business banker and talking over the options can help you decide if financing is the right move and what loan or line of credit terms will work best.
Income ebbs and flows in your micro business aren't a cause for panic. Having irregular income isn't the end of the world – in fact, it's quite common among micro business owners – and having a strategy in place can make it easier to deal with. Knowing how much is going out of the business (and coming in), creating a cash buffer, and developing a solid business banking relationship can help make it easier to get over the occasional income hump.
Checking Small Business Credit Card
