Your income isn’t the problem, your budget format is
Self-employment allows you to have freedom in your schedule, but it also means your income varies month to month. This is stressful for most people! You aren’t sure what the next few months will bring, making it hard to plan. Getting a cash flow system that supports you during slow months takes time, but it’s worth it to gain peace of mind.
Now, how do you create a secure cash flow system? I recommend starting the process at any point of the year. The best time is during a high-paying month. The problem is that we often don’t have time during the busy season to set up these systems, so starting a month or so before also works.
The idea behind this system is to give yourself a “paycheck.” That way, your higher-income months pay for the slower months. We recommend opening a few different accounts; once they are set up, most of the process can be automated.
Step 1: Open accounts
First, you will open bank accounts for the following:
- Income
- Business expenses
- Taxes
You don’t need an LLC to open these accounts. Though you may need an EIN (employer identification number) to open an account depending on the bank. The IRS website explains more about EINs.
Step 2: Direct your income to the right accounts
Set all of your income to go into your income bank account. All payments, even cash, Venmo, or Cash App, should be directed here. Doing this will allow you to clearly see when clients paid and how much. This may take a few months to fully establish if you have already given clients different bank information. If you already have an account specifically for your business, you can keep that as your income bank account.
Step 3: Organize your expenses
Now, go through all of your business expenses, add them up, and create a monthly transfer from your income account to your business expenses account for that total. Once that account is funded, switch all business expenses to be paid from it. Any annual or quarterly subscriptions should be updated as well.
When you pay for variable business expenses you should use this account also. Again you want to separate your business expenses from personal so having a dedicated business account will ensure you’re able to do that.
Step 4: Create a tax plan
Next is tax time! If you have an accountant, they should have given you an estimated quarterly payment amount. If you expect your income to be similar to the previous year, use that number. Then, set up a monthly transfer from your income account to your tax account so you have the full quarterly estimated payment ready by each due date:
- April 15th
- June 15th
- September 15th
- January 15th (of the next year)
Step 5: Pay yourself!
Finally, calculate how much you need for your personal expenses and savings each month. This is your “paycheck”! Use that number to set up a monthly transfer to your personal account from your income account. You can also set up a weekly or biweekly transfer, whatever works best for your habits.
Setting up a stable system takes time.
The goal of this system is for your higher-income months to cover the lower months and give you financial stability. Over time, you will be able to automate more of it so that you aren’t spending your free time managing your budget.
If you are setting up this system during slow months, you may not be able to transfer the full “paycheck” each month. In this case you will need to use savings or lower your personal expenses for the month if needed.
This is a high level overview of a cashflow system, it may not work for you and your business. If you’re looking for a personalized structure but don’t know where to start, schedule a free consultation. We’ll review how we can help and answer any questions you may have about working together. We partner with clients to build their financial foundation so they can focus on living!
