How to Build a Financial System That Makes You Money
The majority of small business owners avoid their bookkeeping and financial tasks because they donât enjoy them. A large portion of business owners think of bookkeeping and financial management as a necessary evil.
Their purpose is to:
Keep track of numbers.
Stay compliant.
File taxes.
Here at People First Finance, we believe that when you understand the state of your business finances, you make smarter decisions. Those decisions can:
Increase profit.
Create long-term financial stability.
Help you avoid costly tax bills or mistakes.
Letâs review 6 practical ways to get in touch with your finances so you can make more money!
1. Understand Your Profit and Margins
Chances are, your number one concern related to profit is âhow much can I pay myself?â It is hard to answer that question without having any idea of your margins and operating costs.
One easy way to develop a deeper understanding of your profit is to audit your monthly transactions. How much are you spending every month on software, tools, etc. What kind of bills are you paying on behalf of your business? Donât forget to include setting aside tax savings!
If thereâs nothing left at the end of the day to pay yourself, then chances are your margins are too slim.
Remember: Just because you âhave money in the bankâ doesnât mean your business is operating at peak health.
How to budget for healthy margins and profit as a business?
We recommend working with this framework for your business budget. đ
30% of your revenue > cost to deliver your service.
20% of your revenue > overhead costs.
Remaining 50% > tax savings, growth, and owner pay.
Hereâs how it works:
Calculate your total revenue from the past 6 months.
Calculate 30% of that total revenue.
Calculate 20% of that total revenue.
Divide each of those numbers by 6 to get your monthly values.
Example:
Total revenue = $60,000
30% of revenue = $18,000 â $3,000 per month
20% of revenue = $12,000 â $2,000 per month
Why does this work?
It keeps you within clear financial parameters.
It helps you focus on the right areas of your business.
It ensures you're always moving towards your goals.
Using a framework like this creates:
Space for growth.
To take time off if needed.
Confidence when paying taxes.
2. Practice Proactive Tax Planning
The best mindset shift you can make for your business is to plan for taxes year round.
Year round planning means that youâre less likely to overpay when tax season rolls around. đ
The key here is finding a tax professional who is going to be proactive and forward thinking about things like:
Optimizing for deductions.
Retirement planning.
Your business entity to ensure youâre minimizing liabilities.
So how often should you be checking in with your tax pro?
Ideally, youâll check in with them once a quarter. This meeting would serve as a chance to review expenses, confirm (and make) estimated tax payments, and proactively discuss whatâs next for your business.
How should you prepare for Tax Planning?
Stay on top of your bookkeeping!
Your accountant canât make great recommendations if you donât have clean books for them to review. Bookkeeping (done well) is the gateway to financial confidence, so be sure to invest in setting yourself up for success from square one.
Need help getting your bookkeeping together? We might be a great fit! Click here to learn more about our service-based bookkeeping services.
3. Make Cashflow Your Friend!
Service based businesses can be hesitant to invest back into their business due to insecurity around cashflow. This hesitancy can impact: hiring, marketing, tech upgrades, and more.
With a strong financial system, youâll have confidence in your cashflow!
This helps you grow your business with intention.
The goal here is to build confidence in your ability to spend without it having to be stressful.
So when should you hire help?
For example, an assistant can be a great resource to free up some of your time so you can do more cost effective tasks. If you review your budget and find that youâre pocketing an extra $2,000-$3,000 dollars a month, maybe itâs time to invest in the next thing!
This is how we intentionally use cashflow to direct our growth.
For the sake of our example, letâs say you invest in a part-time assistant. What can you do with an extra 10, 15, maybe even 20 hours a week to generate more income? For most people, they can focus that time on generating new business leads.
4. Meet Data, Your New Partner
If youâre running a business without understanding the expenses associated with it, thereâs a really good chance youâre overspending. Especially on unnecessary things! After all, every software has a free trial and most of them require payment info, so how many of those have you canceled? đ
The only way you can truly know how to answer that question is by having a strong financial system. A strong system will make you account for all your transactions and review them often.
How should you use data to make decisions?
A great example of data based decisions is redirecting your budget to spending that provides a return on investment. Auditing your business for software or expenses that arenât relevant and then reinvesting that money into areas that further growth and retention.
5. Break Feast and Famine by Prioritizing Profit
Raise your hand if youâve ever had the best month ever, followed by your worst. â
Good news, youâre not alone! The ups and down of running your own business can be stressful, but building a strong financial foundation helps you have confidence in the ongoing impacts of your work.
Imagine this⊠Your paycheck isnât directly tied to cash flow. Youâve been diligent about setting aside bonus savings every month. Now, youâre in a dry spell, but you still get paid. đ€Ż
How do I find my profit zen?
Use that framework we shared above!
Steadily setting aside a set amount of revenue for taxes and an emergency fund or savings if needed.
Depending on what you make currently it could be unrealistic for you to set aside 10% of your income for extra savings. However, as that savings grows, youâll be able to be more selective about the work you take on and the clients you retain. The other pro here is that you will be able to pay yourself a reasonable salary no matter what.
6. Check In On Your Finances Often
We recommend checking in MONTHLY. Not quarterly, not every 6 months, and not once a year.
You have to be in your books to understand your books! That means that every month you should be reviewing cash flow, profit and loss, balance sheets, and transactions.
Why?
Confidence is built through repetition.
A monthly check-in allows you to make pro-active adjustments before they accumulate into mind-numbing costly errors. No need to have one of those âwe ran 10k worth of ads to a page that didnât even work!â horror stories.
Monthly check-ins help keep your finger on the pulse of where your money is and what itâs doing for you.
What should you check on though?
A great place to start is anytime youâre launching new services, bringing on new clients, or thinking about adjusting your work hours.
Is there a way for you to work smarter, not harder? And if so, what do you need to accomplish that?
These check-ins are meant to ensure youâre making progress towards your long-term business goals.
The Bottom Line: Your Numbers Are Your Personalized Growth Map
Building a strong financial system isnât just about knowing how much you owe in taxes, or even lowering your tax bill. Yes, both are amazing things for a business owner to know, but having a detailed understanding of how money flows through your business allows you to optimize for profitability, plan for a sabbatical or a long vacation, AND avoid costly mistakes because you âjust didnât know.â
If you want this year to be the year you break free from the feast/famine cycle while developing a healthy future for your business where youâre growing and scaling like a pro, the good news is that you donât have to do it alone!
