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4 Ways to Better Manage Irregular Income

By Caron_Beesley, Contributor
Published: March 25, 2015 Updated: March 25, 2015

Dealing with an inconsistent income is one of the hardest and most stressful aspects of being a solo entrepreneur. One minute it’s a feast, next a famine, and it’s hard to predict which is coming next.

This isn’t just a problem for your nerves; not knowing where your next paycheck is coming from makes cash flow predictions impossible and budgeting a pipedream. Even if you work like crazy one month, the next month could bring a dry spell and all that hard income you pocketed away quickly gets reabsorbed into keeping you afloat.

While unpredictable income is not something that will ever go away, here are four things you can do to better cope with the highs and lows.

Keep your personal and business finances separate

Any accountant will tell you that maintaining a separate bank account for your personal expenses (checking and savings) and business finances is essential. Not only does it make record keeping and tax preparation a lot easier, it also helps you manage and arrange your finances (aka budgeting).

If you have an online accounting system in place, you can also sync your business bank account with it and automatically import and track expense transactions – providing a dashboard view of your cash flow. If you work with a tax preparer or CPA, it will also make getting them the reports they need a lot easier.

Draw a salary

Once you have your business account set up, make a habit of drawing funds from it on a scheduled basis, much like claiming a salary. Perhaps once a week or twice a month, transfer funds into your checking account to pay your personal bills.

How much you draw depends on your household budget, but a good rule of thumb is to calculate the bare minimum amount you need to pay off your personal expenses and other non-business obligations, like health insurance. This bare minimum should be your baseline salary.

While there may be times when you need to draw more out of your business bank account to pay for vacations and other expenditures, try to maintain a consistent schedule and salary amount – this will help avoid the temptation to be frivolous when times are more prosperous.

Set money aside for lean months

If you do land a windfall client, set aside the money in your savings account (not your personal checking account) so that you can draw on those funds to help tide you over (and alleviate stress) during lean months.

In this setup, you’ll pay your bills from your personal checking account, deposit payments from clients into your business account and use a separate savings account to deposit whatever’s left over after you’ve paid yourself a salary.

Get an idea of your trending income

Predicting cash flow isn’t easy when you don’t know where your next client or project is coming from. However, historical analysis should give you some idea of what your average income is over 12-24 months and give you a better sense of the levels of income that you need to maintain moving forward. If your baseline income tracks lower than your personal budget, consider cutting expenses or finding new business.

In summary… Taking the time to gain insight into your expenses, understanding your income target and drawing a salary accordingly can make your finances a lot more sustainable. It’s a simple model, but it works.

About the Author:

Caron Beesley


Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

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Use Lean Planning to Optimize Management

By Tim Berry, Guest Blogger
Published: March 24, 2015

If you own a business then you have a lot to gain by adopting lean business planning to help you manage better. Don’t bother to do a full formal business plan unless you have to have one for a bank, investors, partners or some other real reason. Instead, do a lean business plan – it’s easy, just a few critical bullet points and lists and essential numbers – and use it to manage better.

“Lean business planning” is what I’m calling a new kind of business planning that’s appropriate for the short attention spans and rapid change we live in.

Why lean? The business meaning of the word lean started last century with lean manufacturing, which was also called “the Toyota way.” That focused on a cycle of continuous improvement that was called PDCA, for “plan-do-check-adjust.” It was adopted in this century by Eric Ries and Steve Blank with their work on lean startups, which is also a process of continuous improvement in steps or cycles, in that case related to starting with what they call a minimum viable product and building a business Plan Do Check graphicwith frequent reviews and revisions.

I say lean business planning because I think it makes perfect sense to apply the same idea of starting with the minimum and reviewing regularly and improving over time to business planning.

It’s especially applicable to business owners because we tend to dismiss business plans as something that only startups need. They take a lot of work. They become obsolete very quickly. But what if we redefined business planning as a streamlined simple lean plan as part of a process that redefines the PDCA idea into a planning version that I’d call PRRR for plan-run-review-revise.

To make that work, the plan itself has to really be easy to do and simple, while its content should be very meaningful and useful in moving the business towards goals. Here’s what I propose:

  1. Strategy is simple bullet points serving as reminders of target market and business offering. Strategy is focus. Don’t do wordy explanations for outsiders – just the bullet point reminders for the team.
  2. Tactics, more simple bullet points, serving as reminders of the main tactics to execute strategy. These would be the key points of marketing plan and product plan, like pricing, channels, features, messages, media, etc. No long descriptions, just bullet points and key numbers.
  3. Concrete specifics include dates, deadlines, performance metrics, assumptions, milestones and task responsibilities. These are lists to be used by management to make ongoing performance more collaborative and more manageabPlan Run Review graphicle.
  4. Sales forecast, expense budgets and projected cash flow.

With my idea of lean planning, that original lean plan is just the first step in that PRRR cycle. It’s a process, not a plan. The plan is reviewed every month in a management meeting that looks at performance and goals, develops collaboration and accountability, and revises the plan.

That makes a business plan not a long boring formal document, but a useful set of lists and tables. It’s what’s going to happen and when; who’s responsible for what; and what’s expected for sales, expenses and cash.

It’s short, simple, streamlined, just big enough to steer the business. Just big enough to meet the business need. It’s about results. It’s about managing a business. Accountability. Metrics. Priorities. It starts simple and grows organically.

If you’re curious about it, I’ve put up a website that lays it out in detail, at leanplan.com. It will eventually become a book, but it’s always going to be a free website, with all the contents of the book remaining on the web for free.

(Images: from leanplan.com) 

About the Author:

Tim Berry
Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 44 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.

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Recapture: Tax Payback

By BarbaraWeltman, Guest Blogger
Published: March 12, 2015 Updated: March 24, 2015

The tax law acts like the Lord, who giveth and taketh away, when it comes to certain tax write-offs. Breaks can be enjoyed now, but there’s a day of reckoning when the breaks are repaid to the government. There are several rules that recapture previously claimed tax breaks. The information here is not intended to enable you to navigate the complexities of calculating recapture, but is meant to alert you to the tax cost you may face.

Tax benefit rule

The tax benefit rule isn’t a benefit for you; it’s a hook for the IRS to recoup what you’ve already enjoyed in tax savings but are no longer entitled to because of developments that occurred after you filed your return. Yes, there’s a Code section for that: Sec. 111 (the IRS explanation is in Chapter 12 of Publication 17). Here’s how the rule works and situations to which it may apply.

Say you take a legitimate deduction on your 2014 for an expense you had that year. However, in 2015 you unexpectedly receive a payment that, if received in 2014, would have prevented a deduction then. Don’t amend your 2014 return; instead report the payment received as income on your 2015 return. Examples:

  • Deducting a casualty or theft loss in year one and receiving an unexpected insurance settlement in year two.
  • Deducting in year one an unpaid invoice (you’re on the accrual method) because you thought it was uncollectible but, surprise, it was paid in year two.
  • Deducting a bad debt (e.g., a loan you made to a vendor that went under) in year one which was later repaid (the vendor paid you personally even though her business was defunct).
  • Tax refunds of state and local taxes that were previously deducted (for individuals the tax benefit rule applies only if they itemized personal deductions and benefited from having claimed the deduction).

Depreciation recapture

Ordinarily, the sale of property at a profit results in capital gain. However, under a special tax rule called recapture, a portion of the gain related to depreciation claimed on the property is re-characterized as ordinary income or taxed at a higher capital gain rate than usual. There are various recapture rules; the one that applies depends on the nature of the property involved. Here are some examples that small businesses may encounter.

Special rule for Sec. 179 property. If you claimed a first-year expense deduction (called the Sec. 179 deduction), there are two distinct recapture rules:

  • If business use of the property drops below 50%, you have to report as income a portion of the previously claimed Sec. 179 deduction even though you haven’t sold the property. The amount recaptured depends on whether or not the property is “listed property” (e.g., cars, trucks, computers).
  • When Sec. 179 property is sold, all of the resulting gain is taxable as ordinary income (it’s reported on Form 4797).

Note: When you trade Sec. 179 property (e.g., you trade in your old company car for a new one), there’s no recapture. However, the basis of the new vehicle is reduced, limiting depreciation for the new vehicle.

Home offices. If you claimed a home office deduction that included depreciation related to the home office space, there is a special recapture rule. When the home is sold, gain generally may be tax free because of the home sale exclusion (no tax on gain up to $250,000 for singles or $500,000 joint filers); gain in excess of the exclusion limit is taxed at favorable capital gain rates (15% for most taxpayers other than those in the bottom two or top tax brackets; 20% for those in the top tax bracket). However, any depreciation claimed after May 7, 1997, is treated as “unrecaptured depreciation,” without regard to the home sale exclusion. This amount is taxed at the rate of 25%.

Realty-related recapture. Businesses that took immediate deductions for any of the following expenses rather than claiming usual depreciation may have recapture:

  • Removing architectural barriers to the elderly and handicapped (deduction up to $15,000).
  • Environmental cleanup costs that were expensed prior to 2012.
  • Energy-efficient buildings (deduction up to $1.80 per square foot).
  • Qualified leasehold, restaurant, or retail improvements (collectively called qualified real property). A special recapture rule applies to qualified real property (see IRS Notice 2013-59)

Credit recaptures

Certain tax credits come with strings that require recapture under certain conditions. The recapture of tax credits is effectively treated as additional taxes you owe on your return for the recapture year.

Credits for rehabilitating certain realty, certain energy property, and other property eligible for an investment tax credit are recaptured if the property is disposed of within five years that it was placed in service. The recapture is reduced the longer the property is held (i.e., 80% recapture after one year, 60% after two years, 40% after three years, 20% after four years, and zero after five years).

Note: If you claimed a premium tax credit for your personal health coverage on an advanced basis when you signed up on the government exchange, there’s recapture if your household income for the year turns out to be less than you estimated. Recapture is figured on Form 8962.


Repaying tax benefits previously enjoyed can be confusing and costly. Discuss your situation with a tax professional.

About the Author:

Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.

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Know Your Numbers: Profit and Loss Statements Explained

By Marco Carbajo, Guest Blogger
Published: March 10, 2015 Updated: March 12, 2015

On CNBC’s Shark Tank, one of the most important lessons that unprepared entrepreneurs learn after ruthlessly being chewed up is the importance of knowing their numbers. Ari Hoffman, Chief Operating Officer for Gobie H20 (episode 426) says, “It cannot be said enough, know your numbers. Even though the show is intended for entertainment, the Sharks are 100% real business investors who are experts at picking companies apart and seeing where the true value lies.”

The fact is that numbers tell the real story of a business. If you want to be successful at managing a business then you need to be able to understand certain numbers such as your profit and loss statement, cash flow statement and your balance sheet. These statements determine the health of your business.

The profit and loss statement (P&L), also known as the net income statement, shows if your company is making money, breaking even or operating at a loss. Obviously you want your business making a profit, but if it isn’t showing a profit, there are some key factors influencing that number that you need to pay attention to.

Let’s take a close look at some important numbers and what it takes to improve the bottom line. When you learn how to make a profit and loss statement and use it to your advantage, the faster you can turn around a business and generate profits.

Some of the key areas to look at are the following:

Pricing – How you price your products/services has a direct impact on your bottom line. First, you need to know the exact unit cost (labor, materials, etc.) for every product your company sells, which is known as cost of goods sold (COGS). The price of your product must be higher than your unit cost if your product is to be profitable. Typically, you would sell your product for the unit cost plus 45 percent.

If you find that your pricing doesn’t cover the cost to make your product or is way below the 45 percent target, there are some changes you can make. First, consider raising your prices, but only do so if you can still remain competitive and your customers are willing to pay for it. If you find that your product is underpriced compared to your competitors, then raising your price is definitely something worth considering.

Second, lower your unit costs by reducing costs of labor and/or materials. Finally, if you can’t sell your product at a high enough price to be profitable, then you may need to consider dropping that product from your lineup. Don’t get caught up in losing money and trying to make up for your losses in volume.

Every product or service you offer should deliver at least a 45 percent premium on top of what it costs to make it or service it.

Gross Margin – If you take the amount of product sales that you generate (net revenue) minus the cost of goods sold (COGS) you are left with what is known as gross margin, also known as gross profit. Remember, your company runs on gross margin ­­– not net revenue!

So if your gross margin is less than 30 percent of net revenue, then your company may run into trouble.

The gross margin is what is used to pay all the operating expenses and variable expenses of the company. Typically, the expenses include – but are not limited to – rent, payroll, insurance, office expenses, advertising, taxes, etc. So how can you ensure your business will generate enough of a gross margin to pay for all the operating costs and fixed and variable expenses of the company? Don’t sell products/services for less than costs of goods sold (COGS) plus 45 percent – that’s how.

Other factors that impact your bottom line are your company’s expenses. Work at keeping your fixed expenses as low as possible. Some variable expenses are much easier to control and scale back if needed during slow months, such as advertising and marketing expenses.

The profit and loss statement reveals whether your company is generating profits, breaking even or losing money. Focus on delivering positive numbers on a consistent basis; it is the key to your long-term success. Need help? This worksheet can help you calculate your P&L statement.

About the Author:

Marco Carbajo
Marco Carbajo

Guest Blogger

Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in 'Fox Small Business','American Express Small Business', 'Business Week', 'The Washington Post', 'The New York Times', 'The San Francisco Tribune',‘Alltop’, and ‘Entrepreneur Connect’.

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How to Improve Your Chances of Getting a Loan With a Bulletproof P&L Statement

By Caron_Beesley, Contributor
Published: March 9, 2015

One of the three essential financial statements for your small business – a profit and loss (P&L) statement – is useful for analytical purposes, but it can also tell any possible investors whether you have a strong, viable operation.

If you’re applying for an SBA loan program, a P&L statement with forward projections and historical data is a must-have. Small businesses are inherently a high-risk investment for lenders, so the more you can do to prove the integrity of your business and your data, the greater your chances of securing a loan.

In fact, alongside impeccable credit, a solid business plan, a strong personal resume and a strategic marketing plan, a P&L statement (also known as the income statement) is one of the top five small business loan requirements, according to Kabbage.

Here are five things you can do to bulletproof your P&L statement and be on your way to securing the financing you need:

1.  Understand what your P&L statement can do for your business

Your P&L statement is a summary of the profit and losses that your business has incurred during a particular time period. Basically, it’s revenue in, less expenses incurred (cost of goods sold, OPEX, and depreciation).

In addition to showing how profitable your business is, your P&L statement also sheds insight on what money is left in the business to pay your salary, clear debts, fund growth or hire an employee. It won’t, however, show if you have enough cash to pay your bills. (Refer to your cash flow statement for those details.) In a nutshell, it’s your financial health report card.

2.  Take advantage of available tools

Getting started with a P&L statement isn’t the easiest thing in the world. If you need help, download SCORE’s profit and loss statement template (.xls). This includes all the necessary calculations to help you forecast net profit. To streamline the process completely (and ensure reliable data), consider cloud accounting tools. Because they automatically feed in data from other reports, cloud software eliminates the hassle of data entry, synchronization and maintenance.

3.  Set profitability goals

How much profit do you want to realize from one month or quarter to the next? Use your P&L statement to track performance against those goals and use the data to glean insights. For example, if revenues were down one month, is there something you can do from a marketing perspective to generate more sales? If expenses are running high, make sure you understand why and plan accordingly.

4.  Set projections

Your lender (and the SBA) will want to see your projections for future profits and losses, plus a business plan that explains how you intend to make your numbers. Plan on projecting out a minimum of one year into the future. Three years, however, is ideal because it shows the impact that external financing will have on revenues and profits. For year one, have a clear sense of your monthly projections; for the remaining years, it’s usually okay to focus on quarterly targets.

5.  Review it regularly

At a minimum, review your P&L statement on a monthly basis. It is a good idea to get into the habit of checking everything on a weekly basis, so you can stay on track and make necessary adjustments to your business plans. Consider hiring and accountant to keep an eye on your key financial statements; the benefits will almost outweigh any fees. Things to look out for include:

  • Increasing sales, but declining profit. This is a sign that something is wrong. Are your costs too high? What about your margins?
  • Stationary sales. Look for opportunities for growth in new markets, product lines or lead generation campaigns.
  • Increases in overhead (utilities, rent, insurance, etc.). Look for ways to keep costs low by shopping around.
  • Increases in the cost of goods sold (COGS). Find out why.

Additional information

Find what else you need to apply for an SBA loan with this Business Loan Checklist.

About the Author:

Caron Beesley


Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

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Thinking Strategically About Your Small Business Marketing

By bridgetwpollack, Guest Blogger
Published: March 5, 2015

Ask many experts what the key to small business success is and they’ll say, “acting strategically.” That means not only planning ahead but also reacting to situations and making decisions that drive your business forward in the right direction. Today we’re sharing resources for how to think specifically about your marketing initiatives in a smart, strategic way.

Market strategy

Right from the get-go, it’s important to bring your business to market in a space that makes sense and as a stronger player against your competitors. In the new online workshop, “Creating a Competitive Advantage,” we learn that a competitive advantage “is the reason why customers come to you in the first place…and why they keep coming back for more.” Identifying and honing a solid competitive advantage is such an important component to creating a lasting business model that will stand the test of time. This workshop teaches small business owners how to:

  • Identify your company's competitive advantage
  • Determine your strengths, weaknesses and goals
  • Devise a strategy to set your company apart from your competitors

Pricing strategy

Once you’ve determined a business model that will compete successfully in your market space, pricing will be a critical component of not only executing your strategy, but also communicating it to your customers. Bob Goedjen, a mentor with Silicon Valley SCORE, offers his expertise on factors to consider when pricing your products: “the state of the economy, your competitors’ pricing and the needs of your target market” to name a few. Bob also provides a few basic rules to follow when setting prices:

  1. Base your price on value, not cost.
  2. Research the competition rigorously and price your product or service higher than the competition.
  3. Plan to provide room for discounts from your established price in order to give prospective customers the added incentive to place the order.
  4. Provide your quotations for service type business based on your hourly rate.
  5. Continue to track your competition, not only for pricing, but also for the features they provide with the product or service that customers value.

Read along as Bob dives deeper into each of these tips and how you can effectively price your products or services.

Mobile strategy

Our next strategic marketing decision involves reaching customers where they are and how they want to be reached. Surveys now show how incredibly important it is to serve customers effectively via their mobile devices. Did you know that 50% of customers use their smartphone to make buying decisions on the way to the store, 60% use their smartphone in the store and 39% of walkouts are influenced by their smartphones? Check out this month’s SCORE Infographic, “Mobile Marketing: Tips to Put Customers in the Palm of Your Hand” for the full picture of how mobile consumption is affecting buying patterns. The infographic also offers tips your business can use to benefit most from these trends including why it’s important to capitalize on local search terms and why mobile-friendly ad and email designs are so vital.

Mobile Marketing

It is critical to think about your business from a strategic mindset every step of the way – from planning to implementation to communication. We hear from small business owners that often they are so caught up in the day-to-day “weeds” of running their business that it’s hard to step outside of that mentality and see the bigger overall picture of their enterprise. In times like these, seek the perspective of an outsider like a SCORE mentor who can offer objective insight into developing a strategy to achieve your goals. Connect with a SCORE mentor for free today.

About the Author:

Bridget Weston Pollack

Guest Blogger

Bridget Weston Pollack is the Vice President of Marketing and Communications at the SCORE Association. She is responsible for all branding, marketing, PR, and communication efforts. She focuses on implementing marketing plans and strategies to facilitate the growth of SCORE’s mentoring and trainings services. She collaborates with SCORE volunteers and develops SCORE’s online marketing strategy.

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