Entrepreneurs start businesses for a variety of reasons, but one of the main reasons is to make a living through their business.
Interestingly, though, so many entrepreneurs don’t pay themselves enough (or even at all) as they get their business off the ground. It’s incredibly common, so if you’re in this boat, just know you’re not alone! And know, there are some easy hacks to…
a) pay yourself
b) save for taxes
c) make your business profitable today
What do I mean when I say ‘allocation’?
Allocating funds in your business is really just distributing them to different areas of your business. Profit First is one of the best known systems for allocating funds. The key to the Profit First system is having separate bank accounts with specific purposes so that when you get paid you can transfer a certain percentage of that income to each account and know you’re covering your bases.
The most fundamental areas your business should be funding are:
What most business owners do is pay their expenses first and then figure out what they have left for paying themselves, growing their profit, and saving for taxes. The problem? Your expenses should not be your #1 priority.
So how much of your top-line revenue (before you pay any expenses) should you allocate to each of these areas? This depends on how much money you need to be making, but here is an example of a place to start:
-Owner’s Pay – 50%
-Tax Savings – 15%
-Profit – 1% (start here and build over time – 1% is more than 0!)
-Expenses – 34%
So let’s say you’re making $3,000 per month right now. The breakdown of this looks like:
-Owner’s Pay – $1,500 – this can be transferred to your personal account
–Tax Savings – $450 – this should go into a separate savings account
-Profit – $30 – this should go into a separate savings account
-Expenses – $1,020 – this should go into a separate checking account
It’s also helpful to have an Income bank account where all of your income first lands (Stripe, PayPal, invoice payments, etc.). From this account, you can then transfer out to the other accounts.
This system may require that you open up a couple of savings and checking accounts. It’s a little work upfront, but trust me, it is well worth it. Mixing your funds is not an effective money management strategy. Check with your bank to see what their account fees are. If they’re high, check out your other local banks and credit unions to see if you can find one that doesn’t charge account fees (they do exist).
The foundation that the Profit First system lays is very helpful, but it’s always important to customize it for your unique business.
Take a minute to reflect on this question…
Why did you get into business? What are the top 3-5 priorities of your business?
The answers to these questions will inform the areas of your business you allocate money to. If you listed something that is not on the above list (owner’s pay, taxes, profit, expenses), then you could add an extra account for that purpose and identify the allocation percentage.
If the main reason you got into business was to make a living, then maybe you need to pay yourself more than 50% of your current income. No problem, adjust the numbers and take the additional percentage points from the expenses.
If your expenses are higher than the allocation amount, review your expenses. Is there anything you can cut? Are you really using all of those software subscriptions? Are there things your contractors are doing for you that you could handle? If you buy educational courses is there a payment plan option available? This process is called an expense analysis and it’s a great thing to do on a monthly or quarterly basis to make sure the investments you’re making in your business are really paying off.
Remember, each business is different. This is just a starting point, but if you allocate your income on a weekly or bi-weekly basis, you will start to look forward to paying yourself. There will be greater ease knowing you’re saving for taxes AND building profit, even if it’s just a little bit for now. Plus, this can be implemented in your personal finances as well!
If you’re interested in learning more about money management, bookkeeping, and money mindset, I’m building a course on ALL the things. Sign up for the waitlist here.