Business income ebbs and flows. Up one month. Down the next.
Dealing with the challenge of tight cash flow in your business is stressful and can result in an emotional roller coaster as you try to figure out how to make ends meet.
The best solution to dealing with up and down cash flow in your business is to prepare for this income roller coaster ahead of time. The top ten steps I suggest you take to prepare for these low income, tight cash flow months are:
1. Set aside 10% of all business income for making decisions: I call this a ‘Choice Account’. Every time your business gets paid, set 10% of that income into a separate account. Wait 30 days (longer if you don’t have a pressing need for the money). After 30 days set aside time in your busy schedule to sit and review your business and personal expenses, and make decisions about how you can most effectively use this 10%. By waiting 30 days to spend this money (and any savings you have kept in your Choice Account) you will be able to make different decisions about spending than you will during daily business operations (especially if you are panicking about cash flow challenges).
2. Maintain a clear boundary between your business and personal life: open separate bank accounts for your business. If you can, set up separate credit cards or lines of credit for your business. Keep business expenses on the business side, and personal expenses on the personal side. When your business receives money, run that money through the business bank accounts, then pay yourself. Use the money you paid yourself to cover personal expenses. If you ever loan money to your business, write up a loan document and transfer that money officially, then make sure you pay it back.
3. Figure out what is most important in your personal life: determine your personal core values, goals, and dreams. Now organize your personal budget so that you are matching your spending to these core values, goals, and dreams. When you focus on spending money on what is truly important you will be able to do more with the money you already have (or don’t have during a tight cash flow month).
4. Figure out what is most important to your business: similar to #3, determine your business core values, goals, and dreams. Now organize your business budget so that you are matching the business’s spending to these core values, goals, and dreams. When you focus on spending money on what is truly important for the business you will be able to do more with the money your business already has (or doesn’t have during a tight cash flow month).
5. Create a prioritized monthly Personal Budget: during tight cash flow months you may be paying yourself less, which means less money to cover your personal expenses. If you have a prioritized monthly personal budget you know the order you are going to cut your expenses in ahead of time, and don’t have to decide what to cut in the heat of the moment.
6. Create a prioritized monthly Business Budget: like #5. During low income months you aren’t going to have enough money to pay all of your business expenses. By prioritizing those expenses when cash flow is good, you will know which expenses to cut first (or pay late first) ahead of time and not make an emotional decision.
7. Always pay yourself: when cash flow is tight one of the first things you may try is not paying yourself that month, and you end up using personal debt to cover the missed pay cheque. This will artificially make your business look more successful because you are covering a business expense (owner’s pay) with personal debt. Not to mention the stress this will cause in your personal life.
8. Use percentages, not dollar amounts to distribute cash to your business expenses: by using percentages you will distribute more cash to an expense category during a good month, and can later use that extra cash to cover the expense during a bad month. Example: on a good or bad month $100 for internet service is $100 for internet service. On a good month 5% of income for internet might be $250. On a bad month 5% of income for internet might be $75. By using percentages, your good months can cover your bad months.
9. Pay attention to your money and spending: observe the money moving through your business and to your personal life on a regular basis (and without judgement, just observe). The more conscious you are of that money flow the better you will be at making decisions.
10. Get clear on the maximum business debt risk you are willing to take: instead of pouring more and more money into your business, and suffering from endless stress over debt, get clear on the maximum amount of debt you are willing to have while building your business. When cash flow is tight, you can use this debt to help keep your business running UNTIL you hit your maximum risk threshold. Then, you need to find other solutions for dealing with your cash flow challenges.
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