One of the questions that come out a lot in my community is how much one should spend, save, and pay one’s self in business. This often comes up when people are finally starting to make money and find that they have little idea on how to allocate it. And lack of even basic knowledge about fund allocation is one of the top reasons why businesses fail.
I’ll be going over the details of proper fund allocation in the video above but here’s a brief outline of the discussion for your reference:
What are the buckets?
Now, what should you really do with the money in your business? Before I dive into the answer to that, we should first be familiar with the buckets that we should be thinking about. There are typically 5 buckets that most people think about (there can be additional ones depending on your business) and they are the following:
- Operating Expenses
- Emergency Savings
- Owner’s Pay
What Goes Into a Good Business Budget:
- Realistic expectation of revenues
- Conservative estimate of expenses
- Buffer for overages or contingencies
- Owner’s Pay!
How much should each contribution be?
It depends on:
- Current financial situation
- Financial projections
- Tax situation
- Short- and long-term goals
- How long you have been in business
Let’s talk about Profit First:
- Focuses on making sure you get paid
- Provides a system for allocating funds
- Focuses too much on what’s in your bank account vs. the financial health of your business
- Overly complicated setting up and managing multiple bank accounts
Knowing proper fund allocation and proper cash flow management can make a huge difference in how you handle your money when it comes to business. That, and knowing your business numbers, can help you in knowing where you stand and how you will move forward.