This is Part 2 of 4 in the Budget Basics series. If you missed part one, Budget Basics – How to Get Started When You Don’t Know Where to Begin, you can read it here.
Starting your own business, taking the leap from passion to action, action to profits, can be scary. Like you, I was, and sometimes still am, scared. Scared of failure, scared that I won’t meet my income goals, scared that my passion is better as a passion project, not a full-fledged business. So rather than dwell in fear, I choose to evaluate my plan, my progress, my lessons, and my successes every day. That includes evaluating my budget, and making sure that I have a sound plan to get paid first, as a small business owner.
Build Your Personal Budget
First things first. Do you know what you need to make in order to survive? Think needs first. Home, food, clothing, car, electricity, internet, gas/tolls, health insurance, and cell phone. What does that add up to? You need to know what your personal budget is, especially if your business is your only source of income. Let’s say you are a family of 5. On average, your necessities are about $5,000/month. To give yourself a bit of leeway for savings, the occasional dinner out, and unexpected expenses, let’s assume a monthly budget of $7,500.
Check out the personal budget sheet I created. It prints best on A5 paper and is a perfect companion to the GOALS daily planner sheet. Grab your FREE copy!
Words to Know
Budget – What you think you are going to spend on an expense.
Actual – What you did spend on an expense.
Fixed Expenses – Expenses that occur at the same time each month or year, and the cost does not change. Examples include rent, car payments, insurance payments.
Variable Expense – Expenses that do not occur regularly or do not have a fixed amount. Examples include groceries, gas, tolls, entertainment.
Total Budget – The total amount budgeted to spend in a given period of time.
Actual Budget – The actual amount spent in a given period of time.
Variance – The difference between the budgeted and actual amount spent in a given period of time.
Fixed Expenses
Now that you know what you need to make to survive, you understand the terms on the budget sheet, and you downloaded the budget sheet, it’s time to track your expenses.
In the light green squares to the left, include the date the bill is due. For example:
- Mortgage
- Car payments
- Car insurance
- Utilities
- Cell phone
- Internet
- TV subscriptions (Hulu, Netflix, Direct TV)
Utilities fluctuate each month unless you are on a budget plan. If you aren’t, you can use the 12 month average of your power bill or move utilities to the variable expense line. To find the average, add up each of your power or water bills for the last 12 months. Once you have the total, divide it by 12, and that will give you the average.
Under the budget column, include the amount of the bill. I typically round up to the nearest $10. This gives us a cushion.
Variable Expenses
You will do the same for “Variable Expenses” and use your best guess to determine the amount. The categories I use for variable expenses are:
- Cars/Gas/Tolls – this includes any car repairs, maintenance, gas, tolls, parking.
- Groceries – I try to use the average monthly grocery expense here. You can follow the same formula used for utilities.
- Health – this includes any co-pays, massages, or out-of-pocket expenses.
- Entertainment – going out for dinner, movies, theater, etc.
- Miscellaneous – anything else.
Actual Expenses
As you pay your bills, record the amount paid under the actual line. I usually round everything up to the nearest dollar for easy math.
Your total budget is your fixed and variable budget amounts added together (the first column of expenses on the left). Your actual budget is your actual totals for fixed and variable expenses. The variance is the budgeted amount minus the actual amount. Your goal is that your actual amount is equal to or less than your budgeted amount. Last month our actual expenses were $396 less than what we budgeted!
Personal Bank Account vs. Business Bank Account
Sole Proprietor – A sole proprietor is someone who owns an unincorporated business by himself or herself.
Limited Liability Corporation (LLC) – A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return (a “disregarded entity”).
If you are a new business owner, operating as a sole-proprietor, you technically do not need a separate bank account. If you are an LLC, you need to separate your business and personal expenses, or your assets could be vulnerable.
It is my opinion that even if you are a sole proprietor, separate your business and personal income and expenses. As your business grows and your income, expenses, and liabilities increase, you will want to understand your financial position clearly.
Your Personal Budget SHOULD Inform Your Business Financial Goals
Now that you know what you have to make in order to survive, you need to determine your product or service fees. We will break this process down in the next post.
What to keep in mind:
- Every human deserves to have their basic needs met.
- You are worth your rates.
- You have a passion for what you do, and your product or service is valuable.
- You are brave and confident in what you do. Your customers are confident in you because you believe in yourself.
Questions to ask as yourself consider your rates:
If you already set your rates and sold your product or service, does your current business income (revenue) meet your personal budget needs?
Do you offer multiple services or products, and/or do you have multiple streams of business income?
Do you account for the time you take to create your product or service?
What are your business expenses (website, accounting software, social media management software, marketing, etc.)?
These questions will help you set your prices. From there, you can determine what your target sales are in order to meet your income goals.
Do you feel more confident in how much money you need your business to make so that you can finally ditch the 9-5 and turn your passion into action, action into profits? Tell me what you think in the comments below.
If you can’t get enough of me, be sure to follow me on social media!