As a freelancer or a self-employed business owner, one of the realities you will face is the fluctuation of income. Unlike employees with a fixed salary, it is hard to predict exactly how much you will earn from month to month. There are times when income is good and money keeps pouring in, and times when income slows down to a trickle.
Another issue you will have to contend with is the timing of when the money will actually come. It doesn’t help much if you land a big contract and your payment depends on hitting particular benchmarks, when that first benchmark is six months away. How are you going to survive between now and that first benchmark?
Bills and creditors need to be paid on a regular basis, and they may not be forgiving of the fact that you can’t pay them while waiting for your first paycheck to arrive. Sometimes, the bills and income don’t come at the same time, causing major problems. The “when” of cash flow is just as important as the “how much”.
Because of the significant cash flow challenges, some give up and simply go back to being an employee. They’d rather give up their entrepreneurial dreams in exchange for a steady flow of income, instead of the continuous juggling of bills and revenues. Others cannot give up their day jobs to focus on the business full-time, as they need a steady stream of income to help with their bills and daily expenses.
To survive being your own boss, you need to do two things: ensuring that cash continues to come in, and learning how to manage that cash.
Experts advise that you should not make the mistake of increasing your spending the moment income goes up – especially if the increase in income is temporary. Don’t spend all that cash away so soon. This is a common pitfall of many business owners: they jack up their spending when they think that the good times will last (don’t we all hope that?). Unfortunately, things could go downhill and it becomes very hard to go back to a lower spending level. Knowing that self-employment is a roller coaster ride, prepare for the inevitable decreases in revenue, and hope that the decrease is short and temporary.
Some also say that you need to base your budget on your lowest income flow, and enjoy the little extra when it comes in. Be prudent in your spending, even live below your means (with the occasional splurge to enjoy the fruits of your labor). Try to save as much as you can and prepare for the rainy days.
From the article “10 Ways to Survive the Roller Coaster Income of Self-Employment,” here are some additional tips:
- Start your business on the right foot.
- Plan your expenses accordingly
- Don’t forget the taxes
- Implement good cash flow management techniques
- Maintain a bread-and-butter client
- Utilize your credit (be careful on this one!)
- Market continuously
- Prioritize your payments.
- Tighten your expenses
- Have a back-up plan.