So you’re making money as an entrepreneur – hooray! But now the big question: what do you do with that money?
Okay, the easy answer is to spend it. The thing is, if you’re just throwing money around willy-nilly, you’ll probably get hit with a nasty surprise come tax season and you won’t have the capital to take care of it. This is where having a business budget comes in REALLY handy.
If you don’t have a business budget in place, that’s okay. The best time to create a budget is yesterday, but the second best time to do it is today! (Cliche, I know. I’m sorry.) A business budget really is important, though, so let’s dive into a few things you should know about budgeting for your business.
1 | If you don’t have a business budget, you may be setting yourself up for failure
Whether you have a budget for your personal finances or not, you may not have given much thought to a business budget. It can really save your butt, though! When you know where your money is going, you can find the leaks more easily. So…
You need to know where your business revenue is going
Without this, it’s hard to know what’s a worthwhile investment and what isn’t. You could be paying $50/month for a service that you completely forgot about and haven’t been using for six months. That’s $300 that just went down the drain! When you’re closely monitoring your income and expenses, you’re in a better position to succeed.
Side note: you don’t need to monitor your bank account every day. That can end up being a bit overboard unless you know that you have a serious financial problem and need to get a handle on it ASAP. Otherwise, you should be fine to just check it once or twice a month. Try designating a specific day (say the first Monday or Friday) of each month and make a calendar appointment for yourself to review your business budget.
Make sure you’re saving enough for taxes
This is one that a lot of us forget! When you’re working for an employer, they will should be taking out the proper federal and state taxes, so you barely notice. (I did have one scumbag employer who didn’t tell me they were paying me a 1099 and I discovered it when I went to do my taxes and got hit with a hefty tax bill that I wasn’t expecting. Hence the “should be” instead of “will!”)
When you’re working for yourself, though, you need to stay on top of those taxes. It’ll hurt, but it’s wise to hold back 15-40% from your business income. It’s also a good idea to check with your accountant to see what they think is the right percentage to keep in escrow for quarterly and annual taxes. Personally, I like to hang onto an extra 5-10% just in case I make more money in my business and get bumped up a tax bracket or two. (One of those “Hooray! Oh no” situations. ?)
Use the Profit First method
I cannot recommend this strongly enough! My wonderful accountant, Shaneh, recommended the Profit First method to me when I started working with her. The basic gist is that instead of calculating your finances using income – expenses = profit, you calculate it as income – profit = expenses. This GUARANTEES that you’re paying yourself before anyone else, which means you won’t be spending every penny that comes in.
By using Profit First, you’re setting yourself and your business up for success. If you haven’t already, give the Profit First book a read. It might change your business!
2 | You can apply personal budgeting principles to business budgeting
This may sound like common sense, but it’s amazing how often we forget basic principles like this. Just because it’s a business budget doesn’t mean you can’t apply personal budgeting principles! My favorite budgeting program is YNAB (aka You Need a Budget) and I keep both my personal and my business budgets in YNAB. They’re in separate budgets, but it makes it easy to apply the same principles across the board. Here are a few of my favorite budgeting principles:
Don’t budget money you don’t have yet
Again, it may seem common sense, but it’s easy to say, “Oh, I have $500 in outstanding invoices that are due to be paid this month, so it’s fine.” What if those clients never pay, though? We all know that happens more often than we want to admit! If you budget or spend money you don’t have yet, it’s that much easier to dig yourself a financial hole.
Track all the money that goes in OR out
Bought a coffee while meeting with a client? Put it in the budget. Did a mini-gig and made $75? Into the budget it goes! Every dollar counts, especially when you’re running your own business, so don’t let them get away from you.
If you’re tracking every dollar that goes in or out, it’s also easier to catch leaks in your business budget. A few dollars here and there can add up to hundreds or even thousands in the long run. Do future you a favor and don’t let that happen!
Balance your business budget every month
We already touched on this one a little bit, but it’s always a good idea to balance your budget once or twice a month. Again, you don’t have to go overboard, but it makes a difference when you’re tracking your budget regularly. Make it a habit – and don’t slack off – and you’ll be that much farther ahead than a lot of other freelancers and entrepreneurs.
Put every dollar to work, especially when there aren’t many dollars!
When you’re running your own business, every dollar counts. And every one of those dollars should have a job. Whether it’s paying for an essential business tool or just hanging out in a savings account to accrue a few extra pennies of interest, make each of your dollars feel valuable and useful and they’ll work that much harder for you. Metaphorically speaking.
3 | Be strategic with your business budget and finances
It’s easy to get caught up in the shiny squirrels of the business world. A new program for XYZ came out over here! Ooh, now there’s a new tool for ABC over there! I MUST HAVE ALL THE THINGS!!!!!
If you let yourself get sucked into each new and exciting product that comes onto the market, though, your business budget will obviously suffer. That’s why we all need to be strategic with our business budgets and overall finances. So how do we do that?
Cut budget items that aren’t performing and yielding a good ROI
If you don’t have a business budget in place already, review the last three months of financial statements for your business. Write down everything that you’ve bought and think about why you bought it and whether it’s been worth it. Are you paying for a program you aren’t using? Ditch it. Have a VA that you prepaid and haven’t used? Start using those hours you paid for!
Make sure that each item you’re paying for is giving you some kind of return on your investment (ROI) and if it isn’t, chuck it.
Be critical of your own spending!
This may be easier said than done. If you’re struggling with this step, here are a couple questions to ask yourself:
Will I regret this later?
If you will, then obviously don’t buy the thing or if you’re already paying for it, cancel it and cut it out of your business budget! If you won’t regret it, then go for it. But if you’re unsure if you’ll regret it, give yourself a couple days to consider. Maybe even flip a coin (heads = buy it, tails = don’t buy it) and see how you feel when it lands. If you’re disappointed by the outcome, that’s a pretty good sign that your subconscious is telling you to do the opposite and it may be worth following that hunch.
Can I really afford this right now?
This one’s simple: IF YOU CAN’T AFFORD IT, DON’T BUY IT. Okay, there’s my soapbox for the day.
Consolidate line items wherever possible
Do you have a mishmash of tools that you’ve cobbled together into a system, so to speak? It may be time to simplify your system and find something to fill all those holes.
One system to rule them all!
I ran into this with Anni, one of my guests on the Sparking Growth Podcast. She was using something like 5 or 6 different tools to onboard her clients. By the time we finished our coaching session, we were able to consolidate all of those pieces into one simple system! My favorite tool for this is Dubsado, though most CRMs can take the place of a lot of cobbled-together systems. Do a little research and find ways to simplify your own business processes. Your sanity AND your business budget will thank you!
4 | Outsource and get creative with your business budget
We’ve all been there. We need to get something but we don’t have the money to pay for it right now. There are a number of ways to solve this that don’t involve money, though!
Don’t be afraid to let others look at your books
I consider this getting creative because a lot of times, someone else can come in, take a quick glance, and say, “Oh! You could be doing/using XYZ and that would solve ABC and free up $100 for you each month!” And you stare are them, wondering how you didn’t see it before.
It’s easy to get so engrossed in our business that we put on blinders. See if one of your biz friends would be up for swapping business budgets and you can both see what holes you can find. Who knows – it could save you hundreds of dollars!
Learn how to budget with a variable income
When working for yourself, your income isn’t always guaranteed. Sure, it may become more predictable as time goes on, but it’s not quite the same as having a salary. (Which can also be taken away at a moment’s notice, so keep that in mind!) Budgeting with a variable income is a whole ‘nother ballgame, so you need to remember that while creating your business budget.
This is where not budgeting money you don’t have comes into play and is one reason I lovelovelove YNAB’s Rule 4: budget this month’s income for NEXT month’s expenses. (I’m paraphrasing there.) My husband works a day job where his income is somewhat variable, so even though he’s salaried, we still operate on this principal, both in our personal budget and my business budget. We keep last month’s paychecks in the bank to pay for this month’s expenses and we don’t budget more than we brought in.
What can I say – it works like magic! And if you budget this way, you’ll always know that you have one month’s worth of money in the bank in case stuff hits the fan.
Trade services when possible
This is one of my favorite ways to keep more money in my business budget! I love trading services when it’s mutually beneficial. Are you an artist who needs a logo created? Find a graphic designer who wants a painting or a series of small paintings or something along those lines (of equal value to their logo services) and set up a trade. It’s win-win and everybody leaves happy. Plus, they may refer more business to you later on, which makes it a win-win-win!
Find an accountant and/or bookkeeper when you need a professional perspective
If you’re still struggling to create a business budget, you may need to call in the big guns. A good accountant or bookkeeper should be able to look at your business budget (or lack thereof) and help you plug the holes. You’ll have to humble yourself a bit and be willing to take the action steps they suggest, but it could be exactly what you need to turn your business finances around.
If you approach your business finances with a big-picture perspective, you’ll be setting yourself up better for success. Apply the principles from personal budgeting to your business budget and make sure you stay strategic about your business finances. Ensure that you’re getting a reasonable ROI from your budget line items and don’t be afraid to get creative with your business budget!
Leave a comment with your thoughts about business budgets! Here are some ideas:
What is the first item you could cut from your business budget and why?
What is one service you would love to purchase but can’t afford? What could you trade for that service?
What is something that you added to your business budget and regretted – and why?
What’s the best item you’ve added to your business budget and how has it changed your business?