Money is an awkward, taboo topic to talk about. It’s personal, it’s uncomfortable, but it’s important!
There are two ways to pay yourself as a small business owner: Owner’s draw or by salary.
Owner’s draw is a withdrawal when necessary, while a salary is a set amount of pay, given to yourself at a set interval.
As a wedding photographer and brand/website designer, my work is highly seasonal and cyclical. This is the case with a lot of photographers and freelancers. The majority of my income comes from May- November. Without preparing for the off season, I would be living above my means during the shooting season and coming up short during the winter. The instability can be bad for your mental health, but it can be detrimental to your business. The immediate need for cash can lead you to take jobs that don’t necessarily align with your brand. This isn’t the end of the world, but it can be a dangerous slope if you find yourself saying “yes” to a lot of opportunities now that will take away from future opportunities. For example, if you’re a wedding photographer, this would look like booking a wedding client that may be a bad fit because you need the deposit. On the other hand, having a set monthly income allows you to essentially take a paid vacation. You can choose a week or even a month if you’re absolutely wild and plan for that in the off season to go completely out of office, and you will still be fine.
I wanted to separate my business’s short term growth, success, and finances from my own. I want to avoid the mindset of “if I take this gig now even though I’ve hit my capacity I will have extra spending money”. I anticipate it will help protect me from burnout and keep my focus on providing a high-quality, highly personal service instead of focusing on reaching a $ goal.
This is the bare minimum. Add up your concrete, recurring expenses, like rent, utilities, gas, food, etc. I’m super privileged to be a single twenty-something. I am unmarried without kids, so I only have to focus on my own expenses. I understand that is a privilege, and I am grateful for that.
This is the padding. I’m not saying bi-annual tropical vacations, but extra for saving, some for fun. “Fun” here is defined as the unnecessary expenses- the girls’ nights, the weekend trips. Be realistic, but be reasonable. By realistic, I’m saying be honest with yourself. I know if I gave myself $0 per month for Target trips. I would crack, break into my savings, and the whole system would collapse. My self discipline levels are strong but not strong enough to fight the urge to snag the occasional Opalhouse candle. And by “reasonable”, I’m reminding myself that I don’t need to budget for unnecessary expenses like food delivery and shopping. Find out what makes you truly happy and budget for that. For me, I value travel, food, experiences, and saving- so I budget for that.
I am not qualified to make any paragraph on saving for retirement but that’s something on my radar.
I can estimate pretty accurately the range of what my revenue and after tax profit will be about a year in advance. Wedding photographers book about a year in advance and I can estimate the rest of my income based on previous years and any growth. I use the lower end of the range when determining my potential income, because I would rather have extra for savings + reinvest into my business as opposed to coming up short.
Four separate accounts are, in my opinion, ideal. These include business saving, business checking, personal savings, and personal checking.
Business saving is a tax account. 30% of all revenue goes directly into this account, and it doesn’t get touched until tax time. You can choose a date, maybe once a week on Friday, to transfer 30% of your revenue for the week to this account.
Business checking is the main account you’ll use. This is the account that’s tied to your CRM or payment processing system as well as all of your transactions. All revenue from online transactions, checks, and cash should go to this account. Expenses will also come out of this account.
Your personal savings and checking accounts are just that, personal.
Once a month is a payday. On the first Monday of every month, I transfer my monthly salary from my business checking account to my personal accounts.
In the early stages of my business, I struggled to comprehend how business finances would work. There was a number in my bank account but I knew a lot of it belonged to the government, a lot of it belonged to my business, and some was mine. But there were more question-marks about the logistics of paying myself than confidence. If I was able to replace any of your “?’s” with a “thumbs up”, I’d call that a win. You got this.