5 Steps to stabilizing your roller-coaster income

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No matter how new or experienced my creative entrepreneur clients are, one of their top worries is how to manage inconsistent income.

It’s easy to find personal finance and business planning tips on how to control your expenses or increase your income, but to truly develop a well-oiled system for achieving financial stability, you need to tackle both sides.

Below are the 5 steps to start creating a more stable income.

(Just to warn you, this is going to be a little spreadsheet heavy, so give yourself at least a good hour or two to go through these steps.)

Sidenote: Once you finish, read how 4 freelancers built recurring revenue models that changed their business. You'll love it.

I promise it’s worth it. 🙂

Note from April: Check out Millo’s ebook, “How Much Should I Charge?” which includes a FREE spreadsheet for you to work through these steps!

Now back to Pam.

Step 1: Know your need-to-spend number

The very first step to stabilizing your income is knowing what you need to make to comfortably get by each month.

You'll also enjoy this episode of our new podcast...

Often, people avoid creating budgets or putting together a list of expenses because it can feel restrictive. But as soon as you go through the putting together a budget for the first time, it takes the burden out of your head (and off your shoulders!).

Remember, budgets aren’t rules, they’re guidelines.

List out and total your personal expenses, like:

  • rent,
  • utilities,
  • transportation,
  • groceries,
  • student loan and credit card payments,
  • that storage unit you’ve been meaning to get rid of,
  • etc.

If you’re not sure how much you spend on variable expenses, like food, shopping, or gas, consider checking out Mint.com. You put in your bank and credit card information into a secure, read-only website (bank-level encryption!) and it categorizes your transactions for you.

Note: It’s easy to get lost in the transactions, so I would suggest only paying attention to the categories that you’re unsure about. 

Once you have a ballpark of your need-to-spend number, you have a minimum goal for how much income you need every month.

Step 2: Put together a 12-month cash flow projection

The first time I put together my 12-month cash flow projection, it changed my freelancing life.

cash-flow-projection

Thinking about money coming in month to month was super stressful, but seeing the potential over an entire year and seeing how the ebbs and flows would even out changed my whole perspective.

I say this because when you open the spreadsheet for the first time (download it here), you may be tempted to close it right back up. I know I was.

A 12-month cash flow projection is basically a view into your potential future. Because you often can get paid in chunks at different points in time, planning month-to-month can give you tunnel vision and lead you into feast-or-famine habits.

By viewing your cash flow as a whole year’s worth of income, you can see the big picture. And often, it’s brighter than you think it is, especially if you’ve been living in that dang tunnel the whole time.

I recommend going through it one section at a time:

Expected income

For the income section, first enter all of your expected, guaranteed income for the next 12 months.

You can make it all one line item or choose to break it up based on the income source.

For instance, you might want to separate project-based and hourly rate work into two separate streams of income.

Projected income

Now this is where the projection part comes in.

We all have some number in our heads of where we’d like to be a year or two from now. Hold on to that business goal and work backwards from there to fill in this part.

Example: Let’s say you want to have 20 new clients by this time next year. That may sound like a huge number, but when you break it out by month, it’s really only 1-2 clients per month.

Fill in what that would look like dollars-wise on the cash flow projection.

Cost of goods sold

This section really only applies if you make products. You should keep the cost to make the goods separate from your operating expenses.

(Some of my clients have also used this section if they have multiple people working for them to track any payouts they would owe to each person.)

Operating expenses

Think about everything you spend money on for your business.

(There is a list in the spreadsheet to get you going, but lots of things can slip through the cracks, like conferences you go to, travel for clients, monthly subscriptions, etc.)

Fill this in to the best of your ability.

Done?

Once you’ve completed all of this, the spreadsheet will automatically calculate a 30% tax rate on your net income (income minus expenses) and you’ll have a bottom line number for where you could be in the next year.

Go back to your need-to-spend number and assess whether you’re clearing this amount or need to perhaps set more aggressive goals. Then move on to step 3.

Step 3: Include recurring income in your pricing structure

The best thing I ever did for my business was create a recurring revenue model as a stream of income. It basically creates a built-in salary for me and actually helps my clients budget my services into their own expenses.

If you don’t already have a recurring income stream, brainstorm how you can charge your clients differently.

Here are some ideas:

  • Have clients pay you at different stages of project completion – instead of getting half up front and half when it’s complete, break payments up into 4-5 different chunks so you get paid more regularly. Learn more about using project milestones here.
  • Set up a monthly retainer model – do you have clients who come to you for random small projects pretty regularly? Consider putting them on a monthly retainer so they can budget you into their business expenses and you don’t have to remember to bill them for every little thing. Learn more about building recurring revenue from retainer-based clients here.

Make it a goal to create recurring revenue equal to at least your current business expenses plus half of your need-to-spend number.

Step 4: Be diligent about saving

If you don’t have a savings account, open one now.

Having all your money in your checking account may unconsciously be making you anxious. It makes you feel like it’s all the money you have in the world.

Even if your checking account is flush with cash, it can feel like there’s nothing to catch you if something were to happen.

I recommend keeping only what you need to spend each month in your checking account. Move the rest into savings.

On good months, you’ll be moving more money into savings. On lighter months, you might be moving money out of savings. This is exactly what your savings is there for.

Based on how you usually get paid, find a regular time to move money into your savings, whether it be every week or every month. This will help your money cash flow projections come true.

Step 5: Update your projections every month with actual numbers

The best way to know if your business is growing is to compare your projected numbers to your actual numbers every month.

Since you already spent all this time putting together your 12-month cash flow projections, now all you have to do is update them every month with actual numbers.

Then compare them to the numbers you projected.

When you do this on a monthly basis, you can:

  • assess whether or not you hit your goals,
  • adjust your projections, and
  • plan any marketing and networking you need to do this next month to get new business.

Instead of wondering where the money is going to come from, you have control over exactly what action you need to take to reach your goals and grow your business.

Questions? Thoughts?

Share them in the comments. I’d love to hear them!

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Say Goodbye to Roller Coaster Income

Your income doesn't have to be a guessing game every month. Let 4 thriving solopreneurs show you how in our free guide.

About Pam Capalad

About Pamela Capalad: Pamela Capalad is a Certified Financial Planner™ and founder of Brunch & Budget (brunchandbudget.com), a place where you can get approachable, friendly, and super relevant financial advice that’s tailored to your specific needs and goals, so you can focus on what you really value.

More about Pam’s business: Most of Brunch & Budget’s clients are freelancers and entrepreneurs who are juggling their business and personal life. She’s right there with you and loves figuring out how to make all the pieces fit. Catch her on the internet radio waves and find her on FacebookTwitter and Instagram.

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  2. […] One of the last things I recommend you do for 2015 is to look ahead to 2016 and create 12-month cash flow projections. […]