All truly successful business owners understand that their success is based on a simple equation: When revenues are greater than expenses, the difference in the two numbers is profit or earnings. Many companies appear to be turning a profit on paper in complicated reports and quarterly earnings, however, what actually goes into the bank account determines if a business makes it through the next month.
What about if we thought of our personal finances the same way? Here are 4 ways to manage your personal cash flow like the boss that you are:
1. Smooth out your personal income.
A lot of new entrepreneurs will just take distributions when they feel like they “need” them to cover their personal expenses. This often leads to losing track of how much money you actually spend each month, which usually means you end up overspending.
If you’re in a situation where you’re not using every dollar left over from the business to pay for your personal stuff (and congratulations, that is awesome!), the best way to manage your personal cash flow is to give yourself a regular salary. By setting up a regular distribution every month, you’ll be able to mentally separate your business and personal finances, which not only helps maintain your sanity (very important!), but will also give you clear benchmarks on how the business is growing.
How often should you pay yourself? The typical time frames to give yourself a salary are weekly, biweekly, and monthly. Since you’re the boss, it’s up to you and you can base it on how often your business gets an influx of cash and your personal level of self-control. For some people, having a month’s worth of income in their bank account could be a disaster for their budget!
How much exactly?There are a number of things to consider, including how regular your business cash flow is, what your current budget is, and if you want to build up savings on the personal side or keep more money in the business. To get an initial number, figure out your monthly living expenses and add about 10-15% to account for some wiggle room. As your business grows, remember to give yourself a raise too!
2. Figure out the timing of your bills.
The due date of a bill doesn’t have to be the date you pay it off. Based on when you pay yourself, you can time the payment of your bills accordingly. For instance, if you decide to pay yourself twice per month, you can plan it so that your rent is paid from the first paycheck and the rest of your bills come out of the second paycheck. This way, you don’t feel strapped for cash for the whole first half of the month.
If your due dates aren’t currently set up the way you’d like them, you can always call the company issuing the bill and have them adjust the due date so it fits in with your needs.
3. Use credit wisely.
Credit cards are like your personal accountable payable. Having a strong credit score and credit report is so critical for every entrepreneur – anytime you want to take out a loan, whether it’s for your business, a new car, more education, or a new home, you will be scrutinized by lenders at least twice as much as an employee. Keeping your credit in tip-top shape will help you demonstrate your reliability as a borrower to any bank or lending institution.
Credit cards can actually be a great way to build up your credit and show how responsible you are. If you have a good rewards card and pay off your credit card every month, the perks can also be worth it. But it can be almost too easy to get caught up in the credit card game.
One cycle that many of us tend to get caught up in (myself included!) is using the credit card for all your purchases, but also spending cash from the debit card. This creates a loop where you always feel like you have to catch up each month. Since you spent the money you had in your checking account last month, you end up paying off your credit card with money from this month, which means you need to spend on your credit card this month, which means you need to pay off your credit card with money from next month, and now it’s the song that doesn’t end.
To help get you out of the cycle without giving up those points, I’ve recommended you pay off your credit card every two weeks instead of waiting to pay once per month.
This accomplishes two things:
→ By paying off your card mid-cycle, a smaller chunk of cash comes out of your checking account for each payment, so it helps manage your budget.
→ Maintaining a low balance on your credit cards helps increase your credit score. Your credit score actually goes down if your balance goes about 50% of your credit limit (i.e. if you have a $1,000 limit, your balance should never go above $500), even if you make all your payments on time. By paying off your credit card balance more frequently, you can stick to this rule more easily.
4. Build a buffer for lean times.
In any business, especially a new one, you will sometimes have months with a negative cash flow. This doesn’t mean you don’t get paid! If you haven’t set one up already, make sure your business has a savings account. At the end of each month, anything you have left over after paying your expenses should be treated as a surplus and moved into the business savings account. This way, when times are a little tighter, you can dip into the savings if necessary, including to pay yourself.
Consciously moving money into a savings account has a side effect too – you’ll want to see that savings account grow! Use this account as a motivator for you to hit new revenue goals as well. When you have a big project or want to expand your business quickly, you may find that you have the cash on hand to do so!
On the personal side, you should also build a buffer for yourself. Remember the 10-15% of wiggle room you added to your estimated expenses to come up with your salary? Take 5-10% and move it into a savings account each month so you’ll have some major wiggle room and won’t have to dip into the business to cover any unexpected personal expenses.
Inconsistent income is part of the deal when you decide to start a business and work for yourself. The key is to create a foundation in both your business and personal life so you can focus on what you do best, which is growing your company!
Pamela Capalad is a Certified Financial Planner™ and founder of Brunch & Budget, a financial planning service that makes talking about your money less scary and more delicious. She loves helping entrepreneurs and freelancers streamline their financial lives so they can focus on growing their businesses.