Just a few small business budget tips can be essential for business success, but many entrepreneurs struggle to maintain healthy financial habits.
Mike Michalowicz's book Profit First offers a unique and effective approach to financial management that ensures profitability and sustainability. It is also something that I immediately implemented into my own small business and it has absolutely been a game changer for ETH3NA Creative.
Below are my five top tips inspired by the Profit First methodology that can help you take control of your business finances, quickly and easily. However, I highly recommend getting this book and reading it from cover to cover. Yes, do it “old school”. Order a hard copy, grab a highlighter and read a chapter a day - they aren’t that long. Write your notes in the margins and make the book yours. It will help you absorb this information and more importantly, put it into action. Enjoy these small business budget tips that are easy to implement!
1. Pay Yourself First
Before I dive into this core principle I cannot stress how important this simple concept is. I speak to business owners starting out and the first thing out of their mouth is that they skip paying themselves. This is a HUGE mistake. I fell prey to this the two other times I attempted to start a small business over the years past. And I can honestly say, this was the number one reason I didn’t succeed in those other attempts.
One of the core principles of Profit First is to prioritize profitability. Instead of following the traditional accounting formula—Sales - Expenses = Profit—Michalowicz flips it to Sales - Profit = Expenses. The idea is to take a percentage of your revenue as profit right off the top, ensuring you are always rewarding yourself as the business owner. By paying yourself first, you make profitability a priority, not an afterthought.
2. Set Up Separate Bank Accounts
To simplify cash management, the Profit First system recommends setting up multiple bank accounts for different purposes. At a minimum, these include:
- Income: Where all revenue flows in.
- Profit: A percentage of your income should go here, specifically reserved as profit.
- Owner's Compensation: Your salary as the business owner.
- Taxes: Save for taxes so you aren’t caught off guard come tax season.
- Operating Expenses: What’s left after profit and taxes should be your budget for running the business.
This separation prevents you from accidentally dipping into funds meant for other purposes and makes it easier to control your spending. Imagine knowing from one glance what you have to spend, guilt free, versus one large bank account that may seem to look healthy but in fact isn’t. Then you overspend and back you and your business into a bad situation that is 100% avoidable.
3. Start Small with Profit Percentages
If your business is tight on cash, start with a small profit percentage—perhaps 1%—and gradually increase it as you get more comfortable. The key is to create a habit of setting aside profit regularly, even if it starts small. Over time, as your cash flow improves, you can increase the percentage, but starting small allows you to transition without overwhelming your finances.
4. Use Parkinson’s Law to Control Expenses
Parkinson’s Law states that work expands to fill the time available for its completion. Michalowicz applies this concept to budgeting, arguing that expenses will rise to meet your available income if you're not careful. By limiting the amount of money in your operating expenses account, you force yourself to be more frugal and strategic in your spending, preventing overspending and unnecessary expenses.
5. Stick to Quarterly Profit Distributions
Another essential tip from Profit First is to avoid the temptation to dip into your profit account. Instead, distribute profits only quarterly. This encourages discipline, ensuring that the money in your profit account is genuinely seen as a reward and not just another source of business cash flow. By making quarterly profit distributions, you create a healthy reward cycle, motivating yourself to stick to your financial goals.
By incorporating these principles from Profit First into your budgeting strategy, you’ll be on your way to a more profitable and sustainable business. Remember, budgeting is not just about managing expenses—it's about ensuring your business is financially healthy and rewarding you for your hard work. As you are reading through this, you may be scratching your head a little and asking what this all means and how to learn more. I said it in the beginning of this article and it's worth repeating; go invest $17 for a hardcopy, $2 for a highlighter and read it from cover to cover. It will be the best $20 investment you will make all year.
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