Effectively allocating money helps you achieve your business goals. No matter your niche, one of your main goals as an entrepreneur is to make a living through your business.
But many entrepreneurs don’t learn about allocating money…and even worse, many of us don’t pay ourselves enough (or even at all). Especially when you’re just getting started in your business or working to achieve your goals, you probably don’t think about allocating money to pay yourself or to other areas.
It really is so important to learn about allocating money in your business — for so many reasons. If this whole concept feels foreign or overwhelming, you’re not alone. But it’s way easier than you think!
With the right hacks and tips on your side, you’ll be able to easily allocate money in your business for the things that matter most.
What Does Allocating Money Actually Mean?
What does it actually mean to allocate money?
When you start allocating money in your business, you distribute funds to different areas of your business. There are lots of different ways to do this, but one that’s super popular is Profit First.
With the Profit First system, you’ll create separate bank accounts with specific purposes and use them to allocate money for those reasons. When you have revenue coming into your business, you’ll be able to allocate those funds properly into the correct accounts.
You can set specific percentages of your income to go into each account. This gives you confidence that money is always going towards causes that matter, like paying yourself, saving for taxes, and more.
How Does Allocating Money Work?
There are a few key areas you should constantly fund in your business.
These include:
- Owner’s Pay
- Tax Savings
- Profit
- Expenses
Many business owners pay their expenses first, and then use whatever money is left to pay themselves, focus on profit, and save for taxes.
But here’s a secret: your expenses should NOT be the number one priority for your business! Instead, you need to focus on all four of those key areas.
Allocating money from your top-line revenue means that you’ll achieve your goals faster and have a much better relationship with your finances. But how much should you allocate in each area?
If you’re making less than $250,000 per year, here are some benchmarks for where to start with allocations:
- 50% of your top-line revenue to Owner’s Pay
- 15 % of your top-line revenue to Tax Savings
- 5% of your top-line revenue to Profit
- 30% of your top-line revenue to Expenses
Create separate savings or checking accounts for each of these areas, and make sure to be consistent each month in allocating money. The easiest way to do this is to set up one main income account as a “holding area” for your money to land. Then, you can transfer the appropriate amount each month to each separate, purpose-based account.
Although this system requires a bit of work upfront (for opening each account), it’s SO worth it! Instead of mixing your funds in one big account, you’re breaking it down into an attainable, sustainable recipe.
Make Sure To Customize How You Allocate Your Money
We’ve already established a solid foundation for allocating money in your business. But one of the most important parts of any money management strategy is customizing and tailoring it to YOUR unique needs.
Your business is different than anyone else’s, and so your needs will vary. How do you think about allocating money the right way for YOU?
Take some time to reflect on your business. Why did you get started, and what are your top three to five priorities?
These questions will help shape the areas you’ll be allocating money to in your business. You can add extra accounts to those above to reflect your unique goals and needs. From there, you will need to adjust the percentages we set up above.
If the main reason you got into business was to make a living for yourself, consider paying yourself more than 50% of your current income. Adjust the numbers and take the additional percentage points from your expenses.
And if your expenses are higher than the allocation amount, review them and audit them.
Try answering these questions:
- 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 without increasing your stress?
- If you buy educational courses is there a payment plan option available?
Another great tip for handling your expenses is to start a wishlist. Add anything non-essential that you want to buy to your wishlist and keep it on the list for at least 30 days. This really helps curb impulsive spending so that you can make better decisions!
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 way you’re allocating money is really paying off.
Consider What Matters To YOU and Make It A Priority When Allocating Money
A huge benefit of being a business owner is being able to support the causes that matter most to you. Charitable donations have a number of benefits financially for your business, but they also make you feel fulfilled.
You can allocate a predetermined amount of your income towards donations and make sure you’re consistently contributing to causes you care about. Whether that’s causes in your local community or larger organizations, you know exactly how much money you have open for donating.
If philanthropy is important to you, allocating money towards donations is a great idea! Start small with 1%-3% of your income each month and start another separate account to hold that money.
Even small donations make a huge difference for people! As your business grows, you can always change the way you’re allocating money and grow your donations fund. Having a sense of your income and how much you want to allocate towards donations is a great way to prioritize community support and ensure the sustainability of your business.
And don’t forget – donations to non-profit 501(c)(3)’s are tax-deductible, just make sure to get a receipt!
Remember, every business is different. Allocating money is so important, but the way you do it should be highly tailored to your unique needs and goals. 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, the process of allocating money can be implemented in your personal finances, too!
