How To Manage Your Online Business Finances For Growth
HOW TO MANAGE YOUR ONLINE BUSINESS FINANCES FOR GROWTH
Discover the stress-free way to run your business so you can pay yourself an income EVERY MONTH and have a powerful tool that helps you make easy financial decisions.
RESOURCES & LINKS MENTIONED IN THIS VIDEO:
Profit First Book https://amzn.to/2M42qy0
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Most people think of their business finances as tax and bookkeeping, but in this video I'm going to show you how to manage your online business finances like a boss so you can figure out exactly how to grow your business and have stress free finances in your personal and your business life.
I'm Shannon Phelps and I help high achieving entrepreneurs scale their revenue and create a time leveraged business. We turn vision into a scalable action plan.
In this video, I applaud you for being here because there's not many people who would like to focus on the finances of their business, but I'm going to show you how you can use a system of finances in your business and it can be a really powerful tool to help you make some really important decisions, but most of all take the stress out of your personal finance and Finances and also your business finances.
The point of installing this system into your business is so that you know that you can take out money as income every single month for you to cover your personal expenses. You know that you have your business expenses covered and you also know that you have your taxes covered and that's basic foundation of this system.
Then on top of that, the benefits are you will know when you can grow your business, when to pull expenses back and exactly what expenses to pull back. And I have got some upcoming videos which are going to dive deeper into how to do every single one of these things so that you run your business with complete clarity and you know exactly when to grow your business. You know you're not leaving any money on the table and you know you're maximizing every single dollar that comes into your business while giving you the life of your dreams.
The foundation of this system is from an amazing book, which has just become a phenomenon in business and it's called Profit First. Now the foundation of Profit First is that it's a cash based accounting system and that's not the thing we need to worry about.
The key thing is that you are using like the old envelope system for your business. So before we had bank transfers and cards and credit, people used to get paid their income in cash. Now for households to manage that income, they used to have envelopes for different areas of their expenses. So they might have a mortgage or a rent envelope, they would have one for utilities, maybe they had one for food, maybe there was an entertainment or luxury one for clothing. Maybe there was a school fees one. So depending on how tightly they had to manage their budget, they would have different envelopes for different categories.
So what Profit First have done is they've taken that concept and they've applied it to your business. Now the key thing that is so important in this system, it's not the management of it that matters... It's what it allows you to see within your business. And we're going to go into that deeper as I tell you about the system.
Using the Profit First system, we break up your revenue into four different categories. So the four categories are:
- Owners income - So the money you take out of your business as income
- Tax - We want to be making sure that you're putting money aside every single month to cover your personal and your business or company taxes.
Before we start transferring money between each of your accounts, we need to decide how much money we're going to transfer into each of these categories every single month. Now, if we were to use a fixed dollar amount, it wouldn't take into consideration two different things.
- The first one is the normal fluctuations that happen with sales and revenue.
- And the second one is that we're constantly trying to grow our revenue. So hopefully every single month we are making more revenue and more sales than we are for the previous month.
So the way to get around this is to use a percentage of revenue for each category and we set that percentage now and then every single time we get our monthly revenue, then we're able to divide that depending on the percentage into each category.
Luckily for us, we are in an online business, so our expenses are generally a lot lower than if we were running a brick and mortar or a product based business. We don't have any inventory or cost of goods sold and we don't have a lease on a property.
So the percentages, I'm about to give you a based on the idea that you are an online business, but that does not stop you from going and making sure that the percentages that you're choosing fit in with your business. Make sure they cover your taxes based on previous years of tax returns and you work out your business and your personal expenses, which is what we're just about to do anyway.
1 - Revenue Percentage Breakdown
The breakdown of percentages that usually works with online business is to start with a lower percentage of profit. The reason that I differ slightly from profit first is because I truly believe that your business should give you the life of your dreams. And the first thing that we need to do is make sure that your business expenses are covered, your personal expenses are covered, and also your taxes are covered. After that, then we can focus on profit, but we are still going to put a percentage of your revenue away as profit because this profit account ends up being a little bit of a safety net or an emergency account because what ends up happening is every three months you can take whatever is in that profit account and you can either invest it back into the business or you can take it as a bonus, as owner's income, so you might end up going on a holiday or you can split it between the two things.
So here is the breakdown of percentages.
Profit should start at about 5% and then you can move up to whatever you feel comfortable with as your revenue grows. The first thing to make sure is that your business expenses and your personal expenses and your taxes are covered.
The second category is your owners income. Now a really good guideline is somewhere between 20 and 50% as I said, when you have an online business, your expenses, your, your business expenses are so much lower than they would be if you're a brick and mortar business. So anywhere between 20 to 50 but that's not strict. Some people go up to 60 or 70% it does really depend on your business. But starting out I would start between the 20 and 50% mark.
The third category is taxes. So we want to make sure that our taxes are covered and that usually happens between 15 and 35% now you might be thinking, but my tax bracket is so much higher than that, but your tax bracket is always your earnings minus your expenses and then you pay the tax on the difference between those two things. And we are taking a percentage of the full revenue.
The fourth and final category is pretty self explanatory. It's your business expenses. So this can be anywhere between 15 and 45% and as I said, this can fluctuate between there as well. But a good starting point is between 15 and 45% let's look at an example. So you can see how this would work in real life.
Let's say that you made $3,000 in revenue for the month of January. If you put 5% away as profit and you took 40% as owner's income, you put 20% away as tax and then you're left with 35% for your business expenses. So you will see that those four figures add up to 100% because you are breaking up 100% of your revenue.
So let's take our $3,000 revenue. 5% of $3,000 is $150 so in your profit account for the month of January, you would transfer or allocate $150 40% of 3000 is 1,200 so for the month of January you are taking out as owner's income, $1,200 then for tax we are going to put aside 20% and that will equal $600 so that would go into a separate account or it would be allocated into a spreadsheet or your accounting software so that we know that there's $600 there for taxes. And finally you would have $1,050 left for your business expenses.
2 - Is it Viable?
So while it's all well and good to have these percentages and then allocate the money out, we need to make sure it's actually viable for your business. The next thing I want you to do is go and figure out what your average monthly revenue is. Now if your revenue fluctuates quite a bit, then the way to work this out is over a three or a six month period. So take the revenue from every single month and added up and then divided by the amount of months that you're using, so if you were doing a three month period and you had $1,000 $2,000 and $3,000 as your monthly revenue, then you would add that all together which would be $6,000 and divided by three so your average monthly revenue is $2,000.
Now I want you to go and work out what the dollar breakdown of your average monthly revenue would be using the $2,000 example that we just came up with.
You would work out what 5% profit of that $2,000 was, which is a hundred your own as income of 40% which is 800 your tax of 20% which is 400 and your expenses of 35% which is 700 the final step to make sure that this is viable in your business is to take those two earlier expenses.
We worked at your personal expenses and your business expenses and to make sure they are less than the dollar amounts that you just worked out from your average monthly revenue and if they're less than that, then you know that you can use that breakdown, that percentage breakdown that you've worked out and you will be able to cover your personal expenses and your business expenses. If the personal or the business expenses are over that dollar breakdown, then you know that you may have a little bit of work. You may have to play with the percentage or you may have to cut back expenses even more.
Now if you have a partner that covers part of your expenses, then you will be fine. You just have to work out what you absolutely need in your life and make sure that your revenue and your breakdown is covering it.
3 - Follow The System
Now that you are finalized your percentage breakdown of your revenue and made sure it is viable in your personal life and your business. Now, the final thing is to just follow the system and I have a couple of key tips which are small but they'll make a huge difference. So the key thing is to make sure that you are working out your revenue every single week, not month, but every single week. We want those micro habits and those micro actions to make sure that at the end of the month we don't have one month of revenue to work out because if we have a whole month to work out, we know it's just data entry and it's boring and it won't get done.
So if you make that a micro habit to make sure that you are tracking your revenue every single week, then when you get to the end of the month, all you have to do is add that last week, figure out what your monthly revenue is and then use your percentages to break down how much money needs to be transferred into your separate bank accounts for each category.
Once the system is up and running, you have a tool that gives you a really clear picture and helps you make decisions. You know when you can spend more money on an ongoing basis or one off purchases, you can figure out how much money you can take as income. Figure out what to do with your profit every quarter. Are you going to reinvest it back into the business or take bonus income from the business or combination of the two?
You also have to remember as you are using this system and your revenue grows and you go from that survival mode breakdown into your business starts to thrive.
You've got more money for your personal expenses and your business expenses. Then you may be able to change the percentages and just keep working at that because it's not like you do it once and then that's it. Continue to make sure that that breakdown is working for you because you want to maximize every dollar. You want to make sure you're living your best life from your business, with your personal expenses, but then the other thing is you want to make sure that you're reinvesting the right amount of money so you can grow your business.
Are you in a position where you can start adding some Facebook ads or advertising or adding a team member to alleviate you of those things that are kids taking up a lot of time, but they're low value tasks. So using this tool regularly in your business will change everything for you.
If you liked this video, make sure you go and check out the deep dive training that I have on the five steps to create a six and then seven figure time leveraged business. You can find that at DesignedToScale.co.
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