Starting a business is an exciting opportunity, in part, because of the vast unknown ahead of you. Any business started on a solid foundation has the potential to make you wealthy, or at least provide you a comfortable salary for years to come — but it also has the potential to fail.
The time between your business’s birth and its eventual (hopeful) stabilization will be fraught with financial volatility — and it has the power to impact more than your chance of entrepreneurial success. According to On Q Financial, “an inconsistent salary will make it harder for you to meet your ongoing monthly expenses, but it could also make it harder for you to be approved for loans and new lines of credit.”
If you want to remain in a financially comfortable position, reduce your stress, and maximize your chances of success, you need to keep that volatility under control.
These are some of the best strategies for reducing your financial volatility while you’re serving as an entrepreneur:
#1. Establish a second source of income
First, and perhaps most obviously, you can establish a second source of income for yourself. Fortunately, there are many ways to do this. For starters, if you’re currently employed at a full-time gig, you can continue to work your existing position and build your business on the side. Obviously, there are pros and cons to this; you won’t have as much time for either your full-time work or your new business, so both endeavors may end up suffering. Plus, a non-compete agreement may preclude you from legally setting up your own enterprise while on the company’s payroll.
If you have a spouse who currently draws a consistent salary, you can talk to them about relying on their income as a temporary measure until your business gets started. If that’s not an option, or if you want even more income to stabilize yourself, consider picking up a side gig or setting up a separate stream of revenue. According to Bankrate, approximately 20 percent of Americans have a way of making money other than their primary source of income—and many of them make more than $500 a month doing it. There are many possibilities here, from renting a property to working a minimum wage job on the weekends, so get creative and try to work something out.
#2. Focus on passive, recurring revenue models
In the scope of your business, you can reduce volatility simply by focusing on more passive, recurring revenue models. Depending on the nature of your business, this may range from very easy to very difficult, but there’s almost always an option for you to move forward. For example, if you sell products to other businesses, consider focusing on businesses who can commit to ongoing monthly shipments. If you sell services, consider enrolling your clients in monthly retainers that you can bill consistently.
Passive revenue sources, specifically, are ones that don’t require active participation to collect (though they’re more effort-intensive to set up). According to Investopedia, “The type of earnings people usually associate with this are gains on stocks, interest, retirement pay, lottery winnings, online work, and capital gains.” In business, this could also apply to things like advertising income and commissions from affiliate links.
#3. Pay yourself a consistent salary
As your business’s main decision maker, you’ll have control over how much salary you pay yourself — and you should pay yourself a salary. Many entrepreneurs are tempted to avoid taking a salary; instead, funneling any extra profits back into the business. While this bootstrapping strategy is often effective for fast-paced growth, it’s only going to increase your personal finances’ volatility.
In the words of Meredith Wood of Fundera, “While there’s no exact equation for determining when or how much, the best way to avoid any emotional hemming and hawing is to think of your compensation strictly in terms of business. What’s in the long-term best interest of your company? With this mind, you’ll ultimately take home what’s fair for your business—and yourself.” You can’t exactly manage a business if you can’t afford your monthly mortgage payments, right? Pay yourself at least enough to get by.
#4. Control your personal expenses
This strategy won’t decrease financial volatility directly, but will decrease the potential negative effects of that volatility. Take some time to get your personal expenses under control, and minimize them as much as possible. For example, you may cut out significant sections of your entertainment budget, or even move to a smaller house or apartment.
There’s an anonymous quote that says, “Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.” You’ll need to be prepared to make sacrifices if you want your business to be a success; doing this before you run into personal financial problems is ideal.
#5. Build up an emergency fund
Before you start a business, make sure you spend some time building up an emergency fund, preferably one that can cover your expenses for six months or more. Unfortunately, 57 million Americans have little to no emergency savings; if you’re one of these people and your business starts struggling to break even, you could find yourself succumbing to an ever-increasing amount of personal debt. Even worse, the chances of your business failing will increase as your stress increases and your personal capital decreases. With an emergency fund, you’ll be prepared for the inevitability of swings in your business income, and you’ll stand a better chance of weathering the storm, long term.
The sooner you plan for the volatility of entrepreneurship, the better—in fact, you should probably start preparing for it while writing your business plan. Have multiple backup plans for generating revenue both within and outside your business, and save as much money as you can by reducing your expenses and building up an emergency fund.
Of course, if you’ve already started a business, you’ll still need to consider the effects volatility could have on you, so consider redrafting sections of your business plan, or at least coming up with some backup ideas to protect you from significant fluctuations.
Proactivity is key to resisting the negative consequences of volatility.