One of the most common struggles that entrepreneurs face is around variable income. It is much harder to reach a goal when it seems like you aren't in control of the income you bring in.

As an entrepreneur your income can fluctuate wildly from one month to the next. You can go from consistently having income for a couple of months to having nothing the next. Building a budget and sticking to it with that type of income fluctuation is not only hard, it can feel defeating.

So how do you budget as an entrepreneur? Well, it is not easy. I wish I could lie to you and tell you that all you have to do is write it out and boom all your struggles disappear and unicorns will sprinkle magical dust that makes everything seem pretty and wonderful....but I can't because my husband tells me that I am a terrible liar.

Besides variable income another big issue entrepreneurs have is how much to pay themselves. Often I see that they pay themselves whatever they make that month and then run into issues when there is a decrease in income the next month. Success is most often defined by the money in your bank account and when there is no money to pay yourself it is easy to feel unsuccessful.

Another issue is how their business bank account is set up. Most just have one giant operating account. Just like with your personal accounts I recommend using the “Magic” Jar theory but as bank accounts:

Operating Account: Place all monthly income in here

Tax Account: Place a % of gross monthly income in here to cover taxes at the end of the year

Expenses Account: Place a % of gross monthly income to cover expenses

Reserve Account: Place excess in here each month to build a reserve

I am not going to lie, budgeting with variable pay is f#$ing hard to do, especially in the first year you do it… but once you get through this first year I promise it gets easier. Warning it involves making lists and budgets for not only your business but your personal spending as well. Now let's get started.

Case Study: The Starks

This is easier if I use a case study to explain so I would like to introduce you to Catelyn and Ned Stark. Catelyn is a self-employed Consultant and Ned works full time with the Government. They have 6 children, Robb, Sansa, Arya, Bran, Rickon and Jon. There are some concerns over Jon’s real parents but this isn’t the time or the place to discuss that. They also have 6 Pomeranians and a turtle. They love to play Catan, work on their swordsmanship and plot to take over the 7 Kingdoms.

A few points to realize with this example

I have made up all amounts in my head and any similarity to your real life is purely coincidence
Catelyn’s only employee is herself and she has incorporated her business
I am using net income amounts after expenses
Her expenses consist of taxes, office supplies, horse food and blood clean up etc. Nothing too complicated.
I am not going into detail regarding taxes, that is a whole other ball game and personally I use an accountant so I suggest you use one too. They have all that fancy schooling for a reason.
Catelyn and Ned have already figured out their monthly family budget is about $6400.00/month (Bills, Food, Mead, Sword Lessons, Savings, Trips to the Wall)

Back to the case study...

Step One – Base Income

First we need to figure out what is our base income and to do that we need to separate Catelyn’s variable income from Ned’s fixed income.

Fixed Income: We know that Ned nets $4500.00 a month into the bank account. Look how well the government pays ;)

Variable Income: Now we need to figure our Catelyn’s average monthly income. I recommend looking at her income for 3-5 years and her expenses to find her average net income.

As you can see Catelyn’s average monthly income over 5 years is $3883

Building your Base Income: We know that Catelyn and Ned need $6400.00 a month to cover their personal budget.

$6400 - $4500 (Ned’s salary) = $1900.00 shortfall that must come from Catelyn’s business

Catelyn’s average income is $3883/month. Catelyn will set herself up to be paid $1900.00 a month

*Now I know what you are thinking – her average income is higher than $1900 a month why wouldn’t she pay herself more. Calm down …. I will get to that….*

STEP TWO – BUILD A RESERVE

Next we need to make sure that the business income is being allocated properly and part of that is starting the reserve fund. This reserve fund is essential as it will cover shortfalls for Catelyn’s salary and unplanned expenses within the business when times are slow. General rule of thumb is 3-6 months of income.

You know your business better than anyone so you know what months during the year are slower and therefore where you will need a reserve. In Catelyn’s case, winter is coming and it is a long one so we will save for 6 months. $1900 x 6 = $11,400

As you can see it will take time to build up this reserve, this unfortunately doesn’t happen over a couple of months. If it did, it would be easy and you wouldn’t need to practice self-control. Speaking of self-control……do not use the reserve for trips to hot destinations and to buy yourself a Porsche. Stuff like that comes out of your personal budget...not the business.

*Author's Note: I am aware that I am no fun*

STEP THREE – REVIEW YEARLY AND MAKE ADJUSTMENTS

Like I tell all my clients, yearly reviews are necessary. We can’t just set this up, cross our fingers and hope that in 20 years when we retire everything just worked out.

Every year you need to review your business income, expenses and taxes.

Are you making more money year after year? You probably have higher taxes and expenses to put away for. As well you need to adjust your salary, if you are making more you should be rewarded.

Are you making less money? You might need to pay yourself less and this may mean adjusting your personal budget.

Did your husband recently get his head chopped off by the government for treason? Appoint your oldest son King of North…it will totally work out for you.

Seriously though, you will need to re-adjust your 5 year average and your base salary as necessary

STEP FOUR – PLANNING AND POTENTIAL BONUSES

At the end of your fiscal year assess the balance of the reserve account

Is there more than the $11,400 you like to keep as your reserve account? What do you do with that excess? Ask yourself some questions:

What are your 1-5 year goals for your business? Expansion? Hire staff? Talk to a planner about where you can save that money .

Will there be any larger one-time costs coming up? Need a vehicle, office equipment?

If you don’t have any other costs that you should be saving for within the business you can now pay yourself a bonus.

Is there less money in the reserve than you planned?

No soup for you. Don’t look at me like that! You should have been saving for that through your personal budget not your business budget.

STEP FIVE – REPEAT YEARLY

Repeat these steps each year. Like I said before budgeting and planning is not about setting things up and forgetting about them. I told you it would be work; I don’t lie about this stuff. However I do promise that it gets easier the more you do it.

Now let's have a moment of honesty, this was a super simplified budget with probably the most straightforward scenarios possible. That is because there is no way I could write an article that covered everything that entrepreneurs face. I strongly recommend seeking out a Certified Financial Planner to assist you, even if it is just to get you started on the right track.

Being an entrepreneur is not for the faint of heart. It is tough; you take a lot of risk. No company pension, no health plan, no guaranteed income. It can take a long time before you are up and running in a way that gives you financial freedom, but it can happen if you plan and budget smart. Don’t give up! You got this.

As an Entrepreneur what is your biggest financial struggle?

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Entrepreneurial Budgeting...it's not for the faint of heart