A little while ago, I started writing about self-employment and some of the things I’ve experienced. Note, however, that none of the things I’m sharing are aiming to be advice.

I mean, I’m not saying “this is what you should do if you’re working for yourself” or anything like that. Instead, I’m offering my thoughts on things I’ve done, why I’ve done it, and if it’s something that works for you, great; if not, that’s no big deal.

A little over a month ago I talked about how accounting – specifically as it relates to taxes – is one of the best things I’ve done since working for myself. It’s freed up so much time, simplified things so much, and taken a major burden off of my plate so I can focus on the core of what I’m trying to do.

But there’s another side or a sibling or a cousin or whatever family member you want to use to account and that’s budgeting.

Budgeting Your Business

Depending on your personality type, budgeting is not something you’re a fan of doing (much less budgeting a business). Personally, I’m extreme Type-A. I probably annoy people more than I’m even aware, but that doesn’t stop me from trying to do things in how I think they need to be done.

So having a budget – both for personal and for business reasons – is one of those things that just makes sense to me.

Budgeting a Business

At any given time, I feel the need to know how much money Pressware has on hand, how much has been invoiced, how much is paid, and how much is outstanding. Do I really need to know this at any given moment?

Probably not. But, again, personality types.

I’m getting off topic, though. The point of this is not to share my weird personality types and why I think I need to do the things I do the way I do them. Instead, I want to make a case for why I think those who are self-employed should have a budget for their business.

1. Where’s Your Money?

I’ve heard this put another way before I really like (both for personal and business):

You’ve got to be knowing where your money is going.

It sounds cheesy, I know, but it’s memorable, right? If you know where your money is, where it’s coming from, or how much you’re going to have available by a certain date, then you can make wise decisions as to what you can do with said money.

  • Do you need to pay yourself a distribution?
  • Do you need to pay someone a bonus?
  • Is there a new piece of software or equipment that you need?

Knowing if you have the money in the business and knowing if you have the funds allocated for such a purpose helps you to make that decision.

2. Fixed Expenses

In any business – just like any household – there are fixed expenses.

  • You’re going to have to pay taxes.
  • You’re going to have to pay for infrastructure (even if it’s just a cell phone, a domain, and web hosting).
  • You’re going to have to pay rent for where you’re working.

Allocating money for those things every month is something that allows you to know you’ve got the necessary things covered for running your your business and for paying the government (at least as far as the US is concerned – I don’t know how things are setup elsewhere).

This prevents surprises. I mean, the last thing you want is to be surprised by an expense that comes up for which you didn’t budget, right?

3. Variable Expenses

Variable expenses within the context of a business are a little bit different than that of a household budget. Ultimately, by the end of the year, you don’t want a lot of cash sitting in the bank account of your business because you’ll have to pay taxes on it.

I’m not giving anymore advice than that because that’s getting into accounting territory. I write code, not ledgers.

But here’s the thing: Throughout the year, I think it’s okay to have a small cushion from month-to-month to plan for the unplanned. What happens if your printer dies on you? Or, worse, your computer?

You’re going to need to be able to purchase a new one so you can actually get work done and get back to business and making money, right?

So plan for that. Anything that’s left at the end of the year, ask your accountant for advice on what to do.

What If This Is Too Much?

Honestly, accounting and keeping track of all of this can get really hectic especially as your business grows.

Through I think hiring a CPA is one of the best things I’ve ever done for Pressware (and it’s something I recommend for anyone who is self-employed), it’s gotten to a point to where I’m going to be using the same firm to handle my books starting next year.

This is not because Pressware has gotten so big that I can’t do these things anymore, or that I’m becoming some type of massive corporation.

Please. It’s still just me sitting in my office listening to ambient music building solutions for others using WordPress.

But the time I’m spending in my accounting software is time I could be spending actually doing work and making progress on building Pressware to be a stronger business.

So, yes, setup a budget for your business and stick to it. And when it gets to be too much or maybe if you’re just not that detail-oriented of a person, have an accountant ready to help.

It’s allows them to focus on what they’re best at doing and allows you to focus on what you’re best at doing.

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Join the conversation! 6 Comments

  1. Taxes!?!

    :)

    OK, so when it comes to most folks who work from home (Tom, assume this is you) how do you handle phone, internet, rent…

    Do you expense a percentage of these utilities or are you taking 100% expense since you couldn’t operate without them. Obviously wife and children benefit from things like internet, but do the majority of folks you know expense 100%?

    On an aside, Me, Myself and Bob is a cool book from Phil Vischer (Veggie Tales) that talks about the rise and fall of the brand from startup to bankruptcy. Phil talks about the fact that he used to be able to calculate from a basic spreadsheet that he created profitability, but then he got to a point where he started trusting others to handle everything. They ended up misleading him during a huge growth phase and ultimately forced him to sell Bob and Larry.

    I don’t expect to be in the situation that Phil was in, but it reminded me to keep my head engaged in the accounting end of things. Ask questions. Ask more questions if I don’t understand the answers.

    • OK, so when it comes to most folks who work from home (Tom, assume this is you) how do you handle phone, internet, rent…

      Yep, this is me and I’ll go ahead and share that the majority of how I handle things regarding my bills is based on the advice of my CPA (who used to work for the IRS).

      • Phone is expensed via the business
      • Internet is expensed via the business
      • I pay rent based on the percentage of square feet my office takes up of my house

      Do you expense a percentage of these utilities or are you taking 100% expense since you couldn’t operate without them. Obviously wife and children benefit from things like internet, but do the majority of folks you know expense 100%?

      • Utilities are expensed just like rent. If my office takes up 10% of my home, my business pays for 10% of the utilities

      The majority of people who I know don’t expense 100% of everything. That could get to be a red flag really quick, but I also know a few people are far more risky than I am so they try it.

      That’s neither here nor there for me.

      I run my business and expenses in the manner that works best for me, and I generally don’t worry about anyone else.

      Phil talks about the fact that he used to be able to calculate from a basic spreadsheet that he created profitability, but then he got to a point where he started trusting others to handle everything. They ended up misleading him during a huge growth phase and ultimately forced him to sell Bob and Larry.

      Totally makes sense in a much larger business and in a business that’s structured differently than mine. I’m working to grow Pressware but very, very slowly so this isn’t something that I hope to have happen.

      Plus, both my father and father-in-law have experience in starting a business and a practice at a young age and making a career out of it, so I use that as advice and input. I also look to others with similar input who can help provide advice along the way.

      Just this week, I was talking with my CPA about accounting services because the amount of time I’m spending on accounting at this point versus actually getting work done is starting to negatively impact my bottom line.

      I don’t expect to be in the situation that Phil was in, but it reminded me to keep my head engaged in the accounting end of things. Ask questions. Ask more questions if I don’t understand the answers.

      Bingo. We’re on the same page here.

  2. Jesse Mecham from YouNeedABudget.com wrote a nice little book on this very topic of budgeting and cash flow for your business:

    http://pacehq.com/

    With a pretty good description here:

    http://pacehq.com/blog/why-im-starting-pace/

    I know many business owners who are using the YouNeedABudget method for their business with excellent results.

  3. My situation is slightly different as I live in a non English speaking country, so hiring a bookkeeper/accountant from the get go was a no brainer.

    That aside, even if I was back in the UK, I think I would have hired one very early. Let’s face it, for the relatively small cost of an accountant (which at least here is tax deductible) it saves a lot of stress, time and energy. They know how to cross the t’s and dot the i’s so any errors and it’s their fault :)

    @Naomi thanks for the share, I’ll take a look at that one!

    • My situation is slightly different as I live in a non English speaking country, so hiring a bookkeeper/accountant from the get go was a no brainer.

      Ah, that makes sense.

      Even for those in English speaking country – or, rather, just the US even – starting with an accountant is what some do. It all depends on how they start their business, really.

      For years, I’ve done this myself but it’s at a point now where it’s simply too time consuming and I’m ready to offload it.

      Let’s face it, for the relatively small cost of an accountant (which at least here is tax deductible) it saves a lot of stress, time and energy.

      Bingo.

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