5 ways to help you manage an irregular income as a business owner

One of the most effective ways to manage irregular income is to base your personal budget on your minimum expected income rather than your average or best months.

To do this, begin by reviewing your historic earnings and identify the lowest level of income you would reasonably expect to receive. You could even choose to budget slightly below this figure to allow for an additional margin of safety.

Next, check your outgoings. Your minimum income should cover all your essential expenses, as well as any regular contributions to long-term savings or investment goals. If it’s unable to cover these, you might need to make adjustments elsewhere in your plan. This could include improving the efficiency of your payment strategy (more on this later) or reducing your pension contributions.

If your minimum income is more than your essential expenses, you might want to use the extra money for discretionary spending, such as holidays and dining out, or to contribute to your long-term security, such as making additional pension contributions.

During particularly successful periods, it can be tempting to increase your spending permanently – this is known as “lifestyle creep”. However, using some of your additional profits to strengthen your cash reserves, investments, or pension can help create greater long-term stability.

By paying yourself a consistent monthly amount and structuring your spending around this minimum income, you can help ensure that your lifestyle remains sustainable, even during quieter periods.

An independent financial planner can help you determine your minimum income and then work with you to develop a budget.

Holding a cash reserve as an emergency fund can be key to ensuring your short-term security when your income is lower than expected. It can help bridge any shortfalls without disrupting your long-term plan.

An emergency fund can also mean you don’t need to withdraw money from your investments during periods of market volatility.

If your business is going through a slow period, there’s a chance that the wider market is also experiencing a dip. Selling investments at such a time could lock in losses that might have recovered had you remained invested.

Exactly how big your emergency fund needs to be depends on your circumstances. But a sensible amount is between three and six months of minimum income as a starting point.

Business owners typically have a relatively high degree of flexibility in how they withdraw money from the business.

So, rather than relying on your salary, it might be more tax-efficient to combine different methods of remuneration. This can help improve the efficiency of your income and give you more room to manoeuvre during slower periods.

This could include:

• Keeping your salary below certain Income Tax thresholds
• Paying yourself in dividends, as these are taxed at a lower rate than a regular salary
• Using ISAs to ensure your savings and investments grow tax-efficiently
• Increasing your pension contributions to boost your long-term security and improve the efficiency of your business and personal wealth

The most appropriate approach will depend on your business structure, as well as your personal tax position, retirement plans, and wider financial goals.

An independent financial planner can help you create an income plan that balances tax efficiency with your income requirements and longer-term goals. They can also perform regular reviews to ensure you’re making the most of available allowances and reliefs.

When you mix your personal and business finances, it can become difficult to understand how much money belongs to the business and how much is available for your personal spending.

When your income is irregular, it can be tempting to transfer money between your business and personal accounts whenever you need it. However, this can make it difficult to understand your true financial position and may put pressure on your business during quieter periods.

So, it’s a good idea to maintain separate business and personal accounts and to have a clear demarcation between the two.

A financial planner working alongside your accountant can help ensure that both your personal and business finances are managed in a coordinated and tax-efficient way.

Cashflow modelling can be a highly effective tool if you have irregular income.

It plots out your life, overlaying it with your key financial information and projecting different scenarios for how your finances could play out over time based on several factors, including your:

• Business revenue
• Income
• Expenditure
• Savings and investments
• Pension
• Age, and its implications for your retirement prospects and life expectancy.

It also accounts for external factors, such as inflation and market performance.

By modelling different “what if” scenarios, you can gain a clearer understanding of how your finances may evolve under a range of circumstances.

This can be especially useful for business owners, as irregular income might discourage you from pursuing certain investment opportunities because of concerns about your financial security. Cashflow modelling can help address this by allowing you to test scenarios before making decisions.

An independent financial planner can use cashflow modelling to show you how fluctuations in your income could affect you over the long term. They can then help you put strategies in place to manage periods when your earnings are lower, giving you confidence that, despite variations in your income, you remain on track to meet your goals.