When you are starting off as an entrepreneur, the financial side of your business may seem daunting. Maybe you have all the ideas and plans in place but calculating all of your expenses and income is harder than you thought. Lucky for you, we have a few tips to make managing your money a little bit easier.
First, you need to calculate your monthly income. If your pay fluctuates, which it most likely will as a new entrepreneur, you can estimate income for three months, then divide by three. If even three months is too difficult to estimate, try calculating a year’s worth of income and divide by 12.
This will tell you about the absolute maximum average that that you have to spend without going into debt – but you can’t actually spend all of that; you also need to calculate your monthly expenses. This second step is easier to estimate: make a list of every monthly expense you can think of, from utility bills to insurance to rent if you are not running your business out of your home. Separate these expenses into two categories: fixed (does not change over time) or variable (fluctuates over time). Variable expenses are often smaller but easily overlooked. These include such items as food for meetings, gas for travel, and fees for venues that you rent.
Thirdly, now that you have recorded your expenses and income, add up each column and see how much wiggle room you have in the middle. A good rule of thumb to follow is to make sure that your expenses never exceed 90% of your income. If they do exceed 90%, you’re cutting it a little close and it would be a good idea to start looking at what variable expenses to cut.
But let’s say you don’t have that problem, and instead, you have some extra cash. Great, you might be thinking, time to go shopping! Slow down a minute, you are not done yet.
Creating a budget is only half the battle. What matters most from here on out is setting goals. If you don’t allocate your spare cash effectively, you could find your entrepreneurial venture sinking as fast as it started.
One safe approach that may work for you is the 50/30/20 rule. It goes like this: allocate 50% of your income towards your needs, such as rent, insurance, or food. The other half of your income can vary, but it is recommended that you put at least 20% towards your savings, including an emergency fund. In general, you should have enough in your emergency fund to cover at least three months of expenses if you fall on hard times. Finally, the last 30% goes towards whatever you want – though the smart thing to do would be to use it for expenses that will contribute to growth (e.g., acquiring equipment, creating marketing materials or joining organizations that might give you leads on new customers).
Hopefully, these tips can help improve your financial health and put your mind at ease. A well-balanced budget can save you when you need it the most, as long as you take the time and effort to manage it well.