1. Get your personal finances on lock
I can already hear you: “What do my personal finances have to do with my business, Alicia?” A lot, actually. If you don’t know your spending habits, you won’t be able to set up your business for financial success.
- Know your living expenses: This means rent/mortgage, car payments, gas, food, insurances, entertainment, utilities, etc. Try to think of every bill you have to pay each month.
- Know your spending habits and budget: These are the extras—Starbucks runs and the Target trips where you get a tad bit carried away. These are the “could cut them if we need to, but don’t want to” expenses in your life. I like to break this category down into food, entertainment, and shopping.
- Know how much you need to save for BIG items: This means things like retirement and college for the kiddos. Think 401K, IRAs, 529 Plans, etc.
- Know your debt: This isn’t a fun one, but you have to know how much you owe in order to decide how much you need to pay off monthly.
You might have other expenses as well—if a vacation isn’t in your normal budget, but it’s something you want, add it!
2. Know the personal salary you need
Add every expense from #1, and now you know the salary the working members of your household need to bring in (after taxes). Don’t forget to multiple your monthly expenses by 12 so you know your yearly number.
Are you the only moneymaker? Then that number is what your business needs to give you each year. If you and your spouse are splitting your personal finances, it’s worth a chat about who is going to cover what bills, so you know what your business needs to cover financially.
3. Know your business’s CODB
Finally! Now you have the number that your business needs to make in order to pay yourself your very own salary. Next, we need to dive into what “living expenses” your business has—its Cost of Doing Business (CODB).
Your CODB is the amount that you need per month to keep your business operating—even if you don’t have clients or sales. In some industries, this number is really small, while in others, it’s huge. CODB is a great way to analyze how your business is doing.
It’s a number you need to know in order to be profitable!
When you calculate it, include things like any rental equipment, loan payments, software or applications, business insurance, and so on.
I have clients look at three months’ worth of their business’s bank statements to see where their money is going. This is a great way not to forget any hidden expenses (that $5 to Google for your email sometimes just isn’t on your radar—I get it!).
4. Finance Fridays!
One of the most common financial frustrations that I hear? Creative small business owners feel like all the work piles up. So here’s a secret: finances are like any other part of your business—they require consistency.
Do you blog once a week? What about a particular day when you edit or paint or plan? Finances are just the same.
Enter Finance Friday. Once a week, make it a habit to enter expenses, income, and file away receipts. It’s simple, especially if you have an accounting software on your side. There are applications that track expenses, income, and mileage. All you’ve got to do is log in and make sure that the software is filing everything in the correct categories.
5. Tackle tax season
Some people loathe taxes, but they can be a breeze! There are tools to make taxes (and Finance Fridays) easy. If you’re a solopreneur, I recommend you look into QuickBooks Self-Employed. This app will make it easy to track income, expenses, and mileage. (It even knows when you’re driving!) Then at tax time, it auto-populates your info into TurboTax, and your taxes are done.
If you’re a bigger business, choose QuickBooks Online. It also integrates with TurboTax but is a little more advanced, and gives you more reporting options that you’ll need as you scale your business.
I recommend setting away 35% of your income throughout the year into a special “Tax” savings account. And if there’s extra in the account after paying your federal income taxes? Hello, bonus check!
And it’s that easy! If you have any finance questions, I’d love to hear from you at [email protected]ish.com.