Ep. 36 | My 3 Rules for Managing My Business Money

You have to be able to manage your business's money for your business to survive, but unless you had a finance degree, it's probably not something you learned in school. Many, many business owners struggle to manage their business money - either leaving it all in the business and never touching it, or spending it all and running out of money to operate the business. 

In this episode, I'm sharing the three rules I follow to manage my business money in a way that makes sure I get paid and my business keeps running.

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Transcript

SPEAKER_00 0:00

Money. Everybody wants it. Nobody wants to talk about it. The whole point of running a business is to make money, but we're not always that great at keeping it or managing it. Now, before you get offended and say, no, the purpose of my business is to help people or to fill a need or to serve my passion. Yes, all those things can be true. But at the end of the day, especially if you have an LLC, if you have an LLC, you have a fiduciary obligation to yourself as a shareholder to make money. Unless you're a nonprofit, you have an obligation to be profitable. And I think as solo business owners, as small business owners, sometimes looking at it that way can feel selfish or wrong because some a lot of us have this idea that wanting to make money for ourselves is bad somehow and makes us evil. I'm here to tell you that it doesn't. It's okay if your only goal for your business is to make money for yourself. Giving you permission for that. And I don't think that's gonna be most of us. It's gonna be a combination of things. But money is a big one, right? Especially if you're in this full time like I am. This business gives me my salary. The business has to be able to pay that salary, or I wouldn't be able to keep working in it and continuing to support it the way that it needs. So it's kind of a it goes both ways, right? I need the business to support me so that I can support the business. All right, I really wasn't trying to get all preachy on you, but I did want to talk about how a lot of business owners have a hard time managing their money. They either have too much of it sitting in their account, they don't know what to do with it, they've just let it sit there, or they spend it all or take it all out to pay their own bills, and then there's nothing left to run the business with. So today I wanted to talk through my I have like three rules for managing money in your business. And this is specifically gonna be for LLCs, but these but these rules work even if you don't have an LLC, they're just more necessary if you do. And I'm gonna share how I use those rules in my business and how I came up with them and what that looks like for me. Alright, let's do it. Hey, I'm Amy Nessheim, licensed attorney for online business owners and founder of my own business, Artful Contracts. You're listening to Legal Made Easy, the show that makes the legal aspects of online business easy to understand and implement so you can grow your business with confidence knowing you've got it all covered. Let's dive in. I just want to start off by saying that yes, these rules are informed by my lawyer brain and they come from somewhere, right? I didn't pull them out of thin air, but it's still my system, and you're gonna have to do what works for you. So take it in, listen, and change it if you need to. Make it work for your business, your money situation, your cash flow situation. It's gonna be different than mine. I'm also not a CPA, so if you don't have one of those, go get one and ask them about it. All right, enough of that. Let's get into it. We're breaking this down by three rules. So the first rule is this business money is business money. If you have an LLC in your business, this is absolutely non-negotiable, but it is still a really good rule if you don't have an LLC just for managing your money, keeping everything straight. So, what I mean by this is that all of the money that your business makes goes into a business-specific account. If you have an LLC, it's owned by the LLC. All of the money that is spent for your business, for business expenses, comes out of that account owned by the business. As an LLC, your LLC is a separate person from you, so it should have separate bank accounts. The second piece that goes along with this is I'm sure you've heard the saying, what gets measured grows, or what gets measured gets managed. The only way to manage your money is to look at it, to keep track of it. So that means that you need a system for bookkeeping and you need to stay on top of it. This is one of the first things that I hired out. My mom is my bookkeeper, which is really fun for us. So every single month we have a standing meeting on the calendar where we go over the financials for the previous month. She also updates our books every Monday, and I look at them every Monday evening to see where we're at. So I'm looking at this stuff quite frequently. She's looking at it separately from me, but every day pretty much. And then once a month we get together and go over our how close we were on our projections, make projections for the next quarter, if we're at the end of a quarter, tracking where all of our money meant, talking about places we can reduce spending, places where there's potential for growth and income, just looking at it. So it really comes down to this keep all of your business money separate, track it as it comes in and as it goes out, and then look at what you tracked because that's gonna be eye-opening if you're not doing it already, to see where your money goes, where it's coming from, and that will help you plan for the future. Okay, that brings me to rule number two. The government gets its cut. You have to pay taxes, no getting around it. And yes, this goes before paying yourself because you have to pay the government, they will take what they're owed, and if you put all of it into your salary and don't pay them, they're still gonna come after you. So paying the government goes first. The general advice is to set aside 25 to 30 percent of every dollar that comes in. That is safe. I do it a little bit differently because I like to live on the edge. So again, this is optional. You don't have to listen to me if you don't want to. But I prefer to figure out my actual effective tax rate, which is at the end of the day, what percentage of my total income goes towards taxes, and then save for that based on my profit, not my revenue. And here's why profit is a much closer estimation of actual taxable income than revenue is, especially if you have high expenses. If you're saving, let's call it 25% of your revenue, but your expenses end up being 50% of your revenue, then you're saving double the amount in taxes that you need to, and you might not end up with enough operating cash left over to do the things that you need to do. So if you're a service provider whose expenses are generally really low, or if you don't have a really good system for keeping track of your expenses, if you don't follow up with your bookkeeping, then saving for taxes based on profit probably doesn't it either wouldn't make that much of a difference if your profit and revenue numbers are pretty close anyways, or you wouldn't actually be able to do it if you don't have a good handle on your expenses, because if you don't track your expenses, you can't count them as deductions. And so they wouldn't actually reduce your taxable income at tax time. But if you have good bookkeeping, you track your expenses well, and you're in a season of high expenses. If you have a product-based business with lower margins, if you're in a season of growth that's requiring a lot of investment in your business, then saving based on your profit, saving for taxes based on your profit might actually help you free up a little bit of cash and it's still accurate. All right, I jumped straight into that, but and I kind of skipped past the whole saving for taxes thing. So make sure you're saving for taxes, figure out what the amount is that you should be saving, which I do based on my effective tax rate. Some people just stick with 30% because it's a safe number. My effective tax rate is 25% at the moment. Set up a separate high-yield savings account and put money into it at an interval that feels good for you. So if you look at your bookkeeping every two weeks, do it every two weeks. If you pay yourself every Friday, do it every Friday. Or if you have a bunch of cash sitting in your account at all times, maybe it's okay to do it monthly or quarterly. You just do not want to get into that situation where you took a bunch of money out of your business, not for business expenses, but maybe for to pay yourself to go on a vacation, you spend it all, and then you have nothing left to pay your taxes. So it's really important to have a system for saving for taxes. And once you reach the threshold, or if you've been operating for more than a year, then you will have to make quarterly tax payments. So just make sure you're keeping up on that too. Alright, that brings me to my third rule. I take care of myself and I take care of my business. So I already said this at the beginning, but if my business isn't supporting me, I'm not supporting my business. We are an ecosystem. We both need to be supported in order to thrive, right? That means I pay myself. That is so important. If you are scraping by because you're afraid to take money out of your business, you're not supporting your business. It's gonna hurt your long-term growth. If you're not in a place yet where the business can support paying you, that's okay. It's okay to keep trucking through that. But what I'm talking about is if you have cash in your business and you're just not taking it out to support yourself and you need it, that's when you get into it's easy to get into resentment and burnout, and it's just not good for growth. Okay, so here's my system. I did a whole other episode on how to pay yourself from your LLC that goes a little bit more into depth, but here's just what I'm doing right now. So I have an S Corp, and what that means is that I have a salary. I'm an employee of my business, I get a regular paycheck. If you don't have an S Corp, I still recommend having a salary for yourself. Give yourself a paycheck on a regular basis, whether it's weekly, every other week, monthly. If your cash flow is inconsistent, pick a relatively small number, something that you can commit to every single time. Just make sure you're paying yourself something. You can always increase that number later, but just give yourself something. So that's what I did. The amount of my salary is relatively low. The amount that I actually get as a paycheck direct deposited every other week is relatively low. But that means that my business has profit. I'm not taking such a high paycheck that I'm cutting into my margins, right? So then, so I have the salary and then I look at my profit separately. Every single month in that money meeting with my mom, I split up my profit from the previous month into three buckets. 25% goes into a savings account, and that's for my quarterly bonus. That's gonna accumulate over the quarter, and then I get to take it out as a bonus at the end of each quarter. 25% is going into a savings account for business reserves. So that is taking care of me, taking care of my business. Business reserves is like emergency savings fund for my business. So if we have a slow month and can't cover some of our ongoing expenses, we can pull out from that. The rest of the profit stays in my business checking account for ongoing expenses and tax savings. So I'm kind of managing three different interests there, right? There's paying myself, there's operating my business on an ongoing basis, and there's protecting my business in the future with savings. So I split these up based on percentages that work for my business that I know are sustainable and aren't going to take too much money out of the operating cash flow. And I'm still taking care of myself with a consistent salary that's low enough that I know my business can always support it, and also bonuses that are directly related to how well my business is doing, how much profit we've made. I use percentages for these because that way, as my profit changes, there isn't rigidity in, well, I had to take out X amount, but I didn't actually have that much profit. The percentages allow flexibility in managing what's actually there and not some imaginary budgeted number. And these also are gonna change over time. So right now, 25% goes to business reserves. I have a goal amount that I want to have in business reserves based on six months of expenses. Once I reach that amount, I'm gonna reduce that percentage for that I'm saving for business reserves and increase my bonus because once the business is stable and taken care of, I can take more money out of it. So this system is loosely inspired by profit first. The idea of percentages comes from there. The idea of always taking a salary comes from there. But I did end up tweaking it a little bit to work for me. So I highly recommend go reading that book, Profit First by Mike Mikalowitz. Just remember, it is a budgeting tool, it's not actual bookkeeping. So you have to do both. So that's the three rules. Business money is business money. The government gets its cut, you have to pay your taxes, and take care of yourself and take care of your business. Make sure you're paying yourself, but still leaving enough money in the business to that it can continue operating. Basically, the bottom line is figure out a system that works for you because it's gonna be different. We're gonna have a different financial stories, different risk tolerance, different cash flows, different levels of consistency with income and expenses. So you're gonna have to find something. There is no really, there it really is no silver bullet that's okay, every business should follow this exact system. You're gonna have to tweak it for yourself. But there are some good templates out there to start with. So I'm hoping that just sharing my system will be helpful for you to be able to set up yours. And it's okay to get help if you need it too. If you're not a numbers person, get somebody else to look at the numbers. I love numbers, but I didn't love the entering each transaction into QuickBooks. So I got someone else to do that part. Let me know if this has been helpful. Thanks so much for being here with me. I'll see you next time.