5 Tips To Stabilize Business with Erratic Income
Irregular income is common in every business. It’s usually caused by internal issues, such as sporadic payment of customers or poor overall business performance. However, it can also be due to external factors like the seasonality of your industry or economic trends.
Whatever the reason is, revenues that tend to be all over the map can make or break your business. The good news is that there are several effective ways to stabilize it. Here, we’ll walk you through the basic ways of dealing with irregular income.
Track Monthly Expenses
Accounting for all your expenditures comes with a lot of benefits. For example, it helps you to stick to your budget, identify spending issues, and meet your financial objectives. It can also guide you to design an appropriate strategy for getting out of debt.
Ideally, it should be done daily throughout the month. While it may sound like a hassle to itemize every expense, doing so ensures that your funds are managed and used wisely, especially if you have an irregular income.
The first thing to do is identify your fixed costs. These expenses have the same monthly amount, such as utility costs, rental fees, loan repayments, or insurance premiums. It’s important to note your average fixed costs, as they determine your company’s current and future financial needs. They’ll also remain the same even if your new income grinds to a halt.
Next is to determine your variable costs. Unlike fixed costs, they tend to fluctuate, increasing as production rises and decreasing as production falls. Some examples of these are raw materials costs or shipping fees. They play a crucial role in your product’s contribution margin, which determines your company’s break-even or target profit level.
Build a Realistic Budget
After tracking your monthly expenditures, set a realistic budget. While it may be tempting to restructure a budget that can fast-track achieving your financial goals, it could end up working against you, not working for you. To tune in with your budget, always know your numbers, essentials, non-essentials, financial habits, and goals.
Here are a few budget systems that companies usually use:
Incremental (last year’s actual figures added or subtracted a percentage to attain the current year’s budget);
Activity-based (identifies the number of inputs required to support the company’s targets or outputs);
Value proposition (priority-based budgeting); and
Zero-based (budget income down to the last dollar).
Incremental budgeting is recommended if your company has the same primary cost drivers yearly. On the contrary, if your company has to address discretionary costs instead essential operating costs, zero-based budgeting can be helpful for you.
Activity-based budgeting is best suited if your company needs cost-cutting efforts and good insight into costs that drive revenue. Likewise, value proposition budgeting is revenue-driven, except it focuses more on satisfying current and new consumers.
Save Emergency Funds
Business insurance policies may cover unexpected costs and lost revenue, but emergency funds can help keep your operations running smoothly. Besides getting a quick loan from reliable lenders like CreditNinja.com, emergency funds are a financial safety net in unforeseen events, including future mishaps, natural disasters, or pandemics.
Emergency funds should be able to cover business expenses for at least three to six months. Alternatively, save at least 10–15% of your average monthly income. It’s important to note that they should change along with your financial situation, so occasionally revisit your plan to ensure the amount still makes sense.
Keep reserves easy to access but separate from other accounts to avoid spending them for another reason. Commonly, you put them in another checking, savings, or business account. Have it automatically transferred, so they won’t slip your mind.
Make a Contingency Plan
Cash reserves aren’t enough. They’ll soon exhaust themselves if disasters keep occurring. There’s a need to have business contingency plans too. In essence, they’re back up plans used as an alternative strategy if expected outcomes fail to materialize. They can minimize damage and response time, helping business operations to get back on track as quickly as possible.
Here’s a step-by-step guide to creating a basic contingency plan:
List all risks in your business;
Weigh risks based on likelihood and severity;
Identify key risks;
Run business impact analysis (BIA);
Start mapping out the contingency plan; and
Monitor the plan.
A business impact analysis (BIA) can help you make a contingency plan for every risk, regardless of the likelihood or severity. It’s an exhaustive investigation into your operations to determine the exact systems that could keep your operations ticking.
The full profit potential of each customer doesn’t end at the point of purchase. There’s a wealth of business opportunities even after sales, where cross-selling can help you tap into it. It’s a sales tactic where you encourage customers to purchase related or complementary products. If it works, it’s great for your customers and for your company, especially if you have an irregular income.
Cross-sell can improve customers’ buying experience and satisfaction. With deeper integration in a customer’s business, your company’s customer lifetime value (CLV) will increase. It’s the total amount of money customers they’re expected to spend on your products or in your business during their lifetime. Understanding CLV can help you gauge current customer loyalty, which will increase your sales revenue later.
Enterprises of all sizes are notoriously unpredictable and susceptible to irregularity. Consequently, cash flows tend to fluctuate, causing businesses to make or break. However, making actionable plans for potential financial pitfalls can help mitigate these risks and stabilize erratic income.