Do you feel like you make a decent amount of money in your creative business, but you’re always wondering how it’s all gone so quickly and where it went?
Do you struggle to plan financially for the inevitable slow and busy seasons as an entrepreneur and have confidence that your business will be sustainable?
Hey everyone, Kira here! Colorado Springs wedding, family, and personal brand photographer and I’m so excited to share a budgeting system with you that truly changed my life as a small business owner.
I am no finance guru. In fact, the most money training I’ve had was one accounting class in college until I changed my major so I didn’t have to take another one. I say that to show you that this system works even for non-number loving people!
This post may contain affiliate links, meaning I make a small commission if you use them to purchase any products. Please know I only recommend tools and products that I absolutely love and have found helpful in my own business.
The system this overview is based on is a book called Profit First by Mike Michalowicz. It literally took me from having no clue or plan for how to budget in my photography business to feeling confident in exactly how much I can spend on any given day and being able to pay myself consistently despite extreme differences with slow and busy months.
During the first two months of COVID-19 when all essential businesses were shut down and I wasn’t allowed to do any photo sessions and even lost two weddings, I was still able to pay myself the exact same amount as usual because of how this system naturally prepares for ups and downs – even though I wasn’t expecting it!
The basic premise is similar to Dave Ramsey’s envelope system, just online and for your business. The idea is to organize your bank accounts so that you have a separate account for each category, instead of looking at one large sum in an account since that makes you feel like you have more money to spend than you do.
Everything you make goes into a checking account labeled INCOME (typically the account you already have set up to receive payments into). Then you open up 4 other checking accounts and label them:
Then you also create 2 Savings accounts in a totally separate bank and label them:
He suggests making these 2 accounts separate and harder to get to since it’s the money you don’t want to feel like you have. I’ll explain why they have the same labels as a couple of your checking accounts in the original bank in a moment.
Basically, everything you make goes into your Income account and then on the 10th and 25th of every month, you transfer all of it into your other accounts, based on percentages.
Because of this, the point of your Income account is to end up at $0 twice a month, which means you’ll want to make sure your bank does not have any required minimum balance for that account.
Several other accounts will end up at $0 as well so be sure this is the case for all of them. If there is a minimum balance requirement, just call your bank and ask them to remove it. If they won’t, tell them sorry but you’ll find another bank who will and they will most likely remove it.
In the book, the author gives suggested percentages based on business size for maximum success with this system. It was so helpful for me to see roughly where I was since I had to idea how much of my Gross income I should be paying myself or putting back into growing my business. Truth be told, I didn’t even know that Profit was ABOVE AND BEYOND what I pay myself (owner’s compensation)! More on that in Step 4.
While he suggests determining where you are currently with these and then adjusting incrementally to get to this point sustainably, here are the suggested ideal percentages for each category based on a small business (solo entrepreneurs or small teams):
I have been using my own spin on the percentages since I like to save for retirement out of my Gross income instead of a smaller percentage of my Owner’s Comp. So here are the percentages I have set for myself:
On the 10th and 25th of each month, take the amount of money currently in your Income account and transfer your allocated percentages into each of your other checking accounts accordingly. Then do the following:
Since you are putting a percentage into your Owner’s Compensation account, but only taking out a certain amount based on your projections for the year, as you go through busy season the amount in the account should grow enough to then cover you during the slow seasons. It’s so genius!!
As previously mentioned, before reading this book, I thought that my Gross income – operating expenses equalled my profit. But it turns out that we still need to pay ourselves and this is something totally separate from profit!
Profit is the amount saved above and beyond everything else, including payroll. It is not meant to be put back into your business, because that would then just mean that it’s an operating expense. Instead, based on the Profit First model, it’s there for two reasons:
Does this system sound like it would be a good fit for you and your business?? If so, I’d highly recommend purchasing the book as it goes into much, much more detail and will help you determine Current Allocation Percentages and your Target Allocation Percentages in order to move forward sustainably.
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