How to deal with peaks and troughs in income
In order for a small business to grow sustainably, managing cashflow properly is essential. Without being able to predict what money will be on hand, taking on any more fixed costs is a daunting prospect.
This means that hiring, new equipment or premises, or other strategic investments are sometimes put on hold until the company’s revenue is on a more stable footing.
So what can a business used to money coming in on a (possibly hugely) varying schedule do to try and achieve a more predictable income?
Balance quickly, balance often
The first piece of advice is easy to understand, but much harder to follow.
Work out what your average monthly income and expenses are, and then balance the books on a monthly basis. On months when your business earns more than these averages; save the extra cash, and then use that money to balance things on months when you earn less.
It’s simple on paper but can be difficult to put into practice. Here’s a few things to consider that might make it easier:
· Make sure you can move money in and out of accounts quickly, easily and without incurring any significant costs.
· Set aside a specific time to do this work in your week, otherwise it can easily get ignored.
· Treat the money put aside for these purposes as the business’ money — its purpose is to keep your company going, it doesn’t belong to the owners.
Use debt selectively
If balancing finances isn’t an option for short periods, companies can use their debt facilities to make sure income troughs are dealt with effectively.
If this applies to your situation then be selective in accessing and using debt. Make sure you know exactly how much it is going to cost, and whether it will have any secondary impacts on your finances (e.g. limiting debt access later in the year, incurring overdraft fees etc.)
At DueCourse we have designed smart finance options so that our low fees are 100% transparent, and we don’t affect users’ credit ratings. These are important things to consider when using debt to offset a lack of short-term income.
Manage client expectations
Attempting to smooth out the peaks and troughs in your business’ income isn’t just about better financial management, how you deal with clients and projects can also make a difference.
In business, everything needs to be done yesterday. But it’s probably fine if it gets done tomorrow. Or next week at a push. Although, some of our key staff are travelling for a few days so it’ll probably be two weeks before we review everything . . . .
This is just how business works in the real world; priorities shift and schedules change. So with that in mind, consider taking a look at how you manage client expectations so that billed work is spread out more evenly.
Be honest with your clients and communicate to them how slightly different scheduling will benefit them (as it means you can dedicate blocks of time to focus just on their work). There is an art to this, and the best way to do things will be different for every client, but some simple massaging of the diary can mean that billed work is done, and invoiced for, on a more regular basis.
Keep suppliers in the loop
For the most part, try to avoid paying suppliers late in order to balance cash. In most cases, keeping the services of good people means paying them promptly, it might cost you more money in the long-term to have to find new suppliers.
But when you’re in a situation where you simply can’t avoid delaying a payment, be upfront and honest about it; hopefully they’ll understand. If you aren’t transparent then you risk upsetting suppliers who might even take some form of action in order to acquire the money they are owed.
This could involve an extra cost for you through the supplier applying an interest or late payment fee for example, or forcing you to go into debt or an overdraft in order to pay them quicker. This clearly won’t help your goal to balance income peaks and troughs! Honesty is the best policy every time.
Deposits and smaller payments
Changing payment schedules can help make income more regular and predictable, although there may be extra administration involved. For example, if you usually bill for a new website once it is completely handed over to the client, consider instead splitting the bill into three smaller payments; when the scoping is complete, once the first iteration is delivered and in testing, and when the final handover is done.
Similarly, you could also ask for a percentage deposit before beginning any work. Even if it is just 10–25%, those months in which several new projects get started up (with lengthy kick-off meetings, discovery sessions and finalisation of briefs) that usually do nothing for the bottom-line, can instead be a little easier to stomach.
Try taking things a step further than breaking large payments into several smaller ones by instead working on recurring contracts.
Recurring contracts are paid to a business in a fixed manner, whether that is weekly, monthly, quarterly etc. and using them will enable you to better predict cashflow.
Implementing your service in a form that will enable you to billing on a rolling basis could be a difficult challenge depending on what you do, but the benefits of getting paid regularly are significant.
Build a predictable income stream
Take things yet another step further by developing a whole new income stream. Don’t just bill differently for what you already do, actually do something different.
An income stream that is more predictable and reliable than large sporadic projects will ensure that short term bumps in the balance sheet are more easily dealt with. Of course, actually building an income stream that operates in this way is no easy task, but if business success was easy, everyone would have it!
Simple to say, hard to do
Ultimately, dealing with peaks and troughs in income is an easy problem to understand but a hard one to deal with.
By following the advice above and taking small, strategic and logical steps that align with your business objectives, and fit with the sort of business you want to run, the impact of lean months can be mitigated as much as possible.
To find out more about DueCourse, visit www.DueCourse.com, or call Andy Taylor on 0161 710 2540 for a friendly, no pressure chat about how DueCourse can help your business to deal with peaks and troughs in income.