This lockdown seems to be going on forever with no respite in sight and we just have to find a way around it. We are all trying our best to make the most of this time, use this time to read more, catch up on movies, and learn a new skill. Some of us have started new side ventures and blogs.
As a part of this process, many of you have asked us how you should manage your irregular income as a freelancer/entrepreneur. Many business owners feel they do not have good control over their cash flow and it is difficult to plan for their own finances. This email is to help you understand how to manage your cash flows as a business owner.
1) CREATE AN EMERGENCY FUND
This will always be important and becomes critical as a business owner. You must project your expenses and cash requirements for 6 months and have that much funds kept aside in liquid investments like Fixed Deposits or Liquid Mutual Funds.
As your income is erratic but your expenses are regular, the Emergency Fund comes as a great support and you can dig into it to pay your bills in those months where the income has been a bit slow. Always, ensure to refill your Emergency Fund to back to its original value during time or surplus cash.
2) YOU SHOULD HAVE 3 BANK ACCOUNTS
Having separate accounts for your various needs will ensure a smooth flow of cash and you will know where exactly your money is going.
Bank account 1 - Business Account
Bank account 2 - Personal Account
Bank Account 3 - Investments Account
Bank Account 1 - All your business income and expenses must be taken care of from this bank account. This will also help you to file your financial statements and know the exact numbers for your business.
Bank Account 2- You must transfer an amount for your personal basic living expenses to your bank account 2. This is the account from where you will spend on your food, home rent, everyday conveyance, etc.
Bank Account 3 - This is the bank account from where you will INVEST. The months in which you make great revenues, you must transfer an amount from your Business Account to Personal Account to Investment Account and Invest that money for your future goals. These goals can be either personal or business.
Having a separate account from where you invest helps you to keep your money in an organized manner (all the extra funds will always be invested) and at the time of redemption, all the redeemed money will flow back to your Investment account. This will help you have control over your investments as well.Today when you have just started to invest, this all may seem like a lot of work, but you must understand that after a few years when you have made investments and business has grown, it will be very difficult to backtrack and put things in place and hence, the same should be done today!!
Use this time to understand how your money is flowing and put a process in place for it. We shall see you soon with more articles on the same.