3 Ways to Budget When Your Income Frequently Changes

As an accountant, I believe there is power in understanding your numbers. Being able to predict revenue, make decisions off historical data, and find patterns in financial analysis is what helps businesses grow. 

Every once in a while business owners are thrown a curveball and information gets convoluted. A pandemic hits, demand suddenly increases, or we find our services fluctuating throughout the year. 

These changes make it difficult to analyze trends and execute decisions to grow our businesses. The risk makes small decisions feel impossible, big decisions are not even considered.

A common issue that throws off the data is frequent changes in income. Whether you offer a seasonal service or demand is based on factors outside of your control, this can create uncertainty. This environment makes it especially difficult to do things like set a budget or run a business.

In this article, we will be discussing a few budgeting strategies for businesses with inconsistent income. The idea is these strategies are flexible enough to ebb and flow with the changing nature of your business. Let’s discuss.

1) Profit First

The Profit First budget was established by author Mike Michalowicz. The idea here is that with every dollar you earn, there is a predetermined percentage of how that dollar will be divided up. You divide that dollar into 4 sections which then sets your budget for the upcoming period.

For example, let’s say your sections and percentages are as follows:

Profit - 20%

Tax - 10%

Owners Pay - 20%

Operating Expenses - 50%

For every sale you make, the revenue is divided into those sections. Keeping with our prior example, let’s say you make a sale of $1,000. You would divide the revenue into the following accounts.

Profit - ($1,000 x 20%) $200

Tax - ($1,000 x 10%) $100

Owners Pay - ($1,000 x 20%) $200 

Operating Expenses - ($1,000 x 50%) $500

That is your budgeted amount for the upcoming period. 

This can be done on a biweekly or monthly basis. The idea is that whatever you make in period 1 is your budget for period 2. Whatever you make in period 2 is your budget for period 3. This allows you to have a flexible budget that reacts to the success of the business. 

2) Consider The Average

The Profit First Method can require a close eye and maybe you are wanting to set a more general budget. Focusing on the average can help do that too. Let’s say you are looking to create a budget for the year 2021. What you would do is take the average monthly income and expenses for 2020 and apply that budgeted amount to 2021.

For example, let’s assume the average monthly income for 2020 was $10,000 and the average expenses were $7,000. This would be your budgeted amount for each month of 2021.

This is a much more straightforward way of creating a budget. It is not as flexible as some other options but it can provide a simple guideline to you as the business owner, as to whether you are ‘above average’ for any given month. 

3) Zero-Sum Budget

The zero-sum budget takes the emergency fund to another level. How the zero-sum budget works is you calculate everything you expect to spend in a month. This will include subscriptions, labor, office supplies, utilities, profit, and anything you expect to spend.

That total is going to be your budget for each month. Then when you come across a month you do particularly well and generate more revenue than budgeted, it is set aside in a separate fund. When you generate less revenue than needed to meet your budgeted amount, you are then (and only then) able to pull from that fund. 

For example, let’s say you need $10,000 to cover all expenses, labor, and profit for the month. In month 1 you generate $12,000. So you set $2,000 aside in your separate emergency fund. 

Month 2 you generate $14,000. So you set aside $4,000 into your emergency fund, now totaling $6,000.

Month 3 you operate at a loss and only generated $9,000. You would then pull $1,000 from your emergency fund. 

This sort of budgeting is easy to adopt and can provide you with security even during the slow months. 

Which Budgeting Strategy is Right For You?

Deciding which budgeting strategy to adopt for your business is going to depend on several factors. Does your business sometimes have issues meeting payroll? Then the profit first strategy may be right for you. 

Do you find your income does fluctuate often but you are usually in the green? Then the zero-sum budget can fit your needs well. 

Each budgeting strategy is going to offer pros and cons. Consider how you would implement each into your business as you proceed.