Put your money in its place: A lesson in allocating yout cash
Have you ever wondered how much you’re supposed to be spending in your business?
Whether your spending is normal? Too much? Not investing enough back in?
Figuring out that sweet spot can be as frustrating as a flight delay after a long trip, but today, I bring you good news:
I’ve got a plan on exactly how to divide up your income so that your bills are paid, taxes are covered, and you actually get paid.
Think of it as a watered-down Profit First method for those of you wanting to dip your toes into those waters (and FYI, if you’re an entrepreneur, you SHOULD be getting those cash-managing feet wet).
So let’s get to where you should send a portion of your money first:
OWNER’S PAY (25-35%)
This is probably the most volatile of all the categories because it largely depends on the nature of your business. So why did I put it first?
Because I feel it’s the most important.
I completely understand that some companies are in stages of growth, and you most likely are there.
But that doesn’t mean your hustle should be unrewarded.
And it also doesn’t mean you should build a business that doesn’t support that 25-35% allocation.
You can do what you wish with that money once it’s in your pocket – heck, invest it back into your business if you want to. But make sure you’re paying yourself something, ok?
If you aren’t within this range yet, set it as a goal, and slowly move your allocation from where you’re starting now towards it.
And if you’re over that amount, high-five to you – just make sure you aren’t stifling your business by taking all of the money out of it.
TAXES (10-15%)
The bane of every entrepreneur’s existence.
The fact of the matter is, you will have to pay tax on the profit you earn in your business. And the goal is for you to use the cash in your business to cover those taxes so that it doesn’t come out of your personal pocket.
No matter what, you should be setting aside this money. If it eventually ends up to where you don’t need all of it, wonderful – consider it a nice bonus to yourself.
But make sure it’s there should Uncle Sam come calling.
PROFIT (3-5%)
Consider this your own little do-with-what-you-want fund.
The purpose of this is to just build a buffer in your business so that you are always creating a little wiggle room between your revenue and expenses. A little gap for your profit, might you say.
Personally, I would suggest initially setting up this account to act as a sort-of business emergency fund. Keep funneling money until you’ve built up 3 months’ worth of expenses and then switch the purpose to act as a bonus for you.
Each quarter (after building up the emergency fund), either pay it out to yourself or invest it back into the business.
Trust me, you’re going to like this one.
OPERATING EXPENSES (45-60%)
This is the money you run your business with.
The money you used to pay your bills. Invest in a coach. Attend a conference. Expand your team.
Again, there is some wiggle room with this category (especially if you are a product-based business), but know this:
The better you are at keeping your expenses within (or close to) this range, the more profitable you will be in your business.
Remember, these are just guidelines and the ranges can vary drastically depending on your industry. Don’t panic if you are nowhere near these ranges – some of you potentially shouldn’t be. Just reevaluate where you are, where you want to be, and make a plan on how to get there.
