With freedom comes responsibility! We have all heard this quote in one form or another, and it is true for the Solopreneur. Indeed, as a solopreneur there are numerous perks. For example, you can use your energy and passion to create a business that is all your own. You are free to set your own schedule, business values, mission and vision. Yet, it is equally true that as much as you enjoy benefits you also have greater responsibilities.
As your own boss, you now manage numerous aspects of your business. There are administrative duties, sales, marketing, and social media to take care of. And then there are the numbers. You know, revenue and expenses (if you are anything like me this is my least favorite thing to do). As a solopreneur a clear understanding of where your money is coming from and where it is going is necessary. Having a budget will enable you to do this.
Simply defined budgeting is a “process of looking at a business’ estimated incomes… and expenditures… over a specific period in the future.” In essence budgeting is critical to the overall success of your business. It enables you to monitor and control your cash flow. Furthermore, it allows you to invest into new opportunities. Additionally, a budget will ensure you can meet your current obligations. Finally, a budget helps you to meet your objectives.
So, now that we know what it is, how does one go about creating an effective budget? Are you new as a solopreneur? Do your budgeting skills need some tweaking even though you have been at this awhile?
The following 3 practices should point you in the right direction.
3 BUDGETING PRACTICES TO PROMOTE SUCCESS
PRACTICE I: SEPARATE BUSINESS AND PERSONAL FINANCES
On researching this topic I came across one practice consistently. It is keeping personal and business finances separated. At first glance this may seem like more of a cashflow management practice. However, the two are linked. When considering budgeting for an upcoming year, separating accounts and credit cards will make the process a whole lot easier. Your bookkeeping will be organized and in turn you will reap the following benefits:
- Streamlined Record Keeping. Your personal and professional life will be organized and up to date. You will be able to clearly track what you spend and what you make. When cash flow is accurate, can compare it to your budget, and manage your business at any given time simply and effectively.
- Make Spending Threshold Clear. In light of the above you will avoid overspending and be able to make informed and practical decisions.
- Save Time. You will avoid sorting through months of statements and receipts to determine what was for personal/business purposes.
- Simplify Tax Season. As alluded to you will save time. Your tax return will likely be more accurate. It will be easier to determine taxable benefits and deductions.
It should be noted that you can purchase software that helps with this process. Pro-Ledger Online is one such program. This cloud version allows you to import data from your online bank account.
PRACTICE II: CREATE AN ANNUAL AND MONTHLY BUDGET
Once you have separated your business and personal finances it is important to create your budget. One of the most important principles I came across with this practice is to be realistic. To determine you budget you will need to figure out what you actually need to earn in order to keep your business running. Furthermore, you have to also determine what you need in order to meet your personal financial obligations.
For many solopreneurs who are starting out, or are in their early years, it is not possible to quit their 9-5 day job. Usually their venture begins on the side. As time passes and they manage their cash flow creating revenue and profit, they eventually become a full time solopreneur. So whether this is your first time creating a budget or you are re-evaluating your budget method, the following steps should help.
Step 1: Start Where You Are At
According to Lynne Somerman, “to start budgeting get realistic with where you are right now. Remember, the numbers are facts.” As a new solopreneur you will want to answer the following questions:
- How much can I spend to begin my business? What amount do I have and am willing to spend to get my business off the ground?
- How much are my start-up costs? Begin to make a list and determine what you think you need. This may include items such as business registration, office furniture, computer, logo, office supplies, domain name and so on.
- Do my start-up costs and what I have to spend in line with each other? If they are, GREAT! If not go back over the list and determine what can wait until later. Sometimes what we think we need, and what we actually need are different. Tweak your list.
Step 2: Determine Ongoing Expenses
This step applies to both newbies and long haulers. It is critical to consider all that you need in order to run your business effectively from month to month. This will include such things as rent, phone, internet, gas, advertising and so on. One additional consideration to include is a buffer amount. By this I am referring to an amount that will be available for unexpected costs. It is also wise to consider an amount for taxes so you are not caught off guard as well as amount for your retirement.
Having determined your expenses for the business, you will also need to determine your personal expenses in order to live. Some of those costs are fixed such as housing, utilities, phone and internet. Others are variable such as groceries. With the latter take an average.
When starting out as a solopreneur you may be taking an educated guess, and that is okay. Better to make some kind of budget than none at all. Perhaps talk to others who ventured out on their own. Once you have been running your business for awhile these expenses will become clearer. You will also have a better idea of the highs and lows of your business, particularly if you are a seasonal business. With this information you will be able to adjust your budget accordingly.
Once you have completed steps 1 and 2 you should have a good idea of your annual and monthly budget.
Step 3: Create a Buffer Fund
As mentioned above one consideration to make when creating a budget is a buffer fund. In other words, saving for a rainy day. It may be tempting in the good months to spend more, however it is wise to begin putting money aside for those unforeseen situations. As also alluded to if your business is seasonal, you will want to be prepared for the slower months.
There is no one set rule to creating a buffer fund. The following is a suggestion.
A. Just Starting Out: Try to set aside a months worth of expenses.
B. Over Time: Try to build to 3 months of expenses. Then, continue to build until you have 6 months to a year’s worth of cushion.
PRACTICE III: CHECK IN ON YOUR FINANCES REGULARLY
According to a Forbes article entitled 5 Financial Mistakes Solopreneurs Make When Starting a Business, the number 1 mistake is failing to accurately track expenditures. The new owner will begin, well intentioned, keeping track, but then the reality of the daily routine and challenges set in. The regular attention to expenditures falls by the wayside. It cannot be overstated that if you wish your business to succeed you need to stay on top of your finances. Three ways to do just that are:
- Purchase a system to help keep track of your monthly business expenses and revenue.
- Schedule time bi-weekly or monthly to review your financial position/budget. If necessary, make an appointment with yourself on the calendar to do just that.
- Schedule time to check in with your accountant.
Talking about money, or looking at the numbers may not be one of your favorite things to do. It may even be scary for you. Believe me you are not alone. However, if yo wish to be a successful solopreneur there is no getting around it. Being free to do what you love, also means you need to be responsible with the finances. The previous 3 steps will get you well on your way to remaining free and responsible