When you're self-employed your budget can be a lot more difficult to figure out than someone that has a regular paycheck coming in. A standard employee income can make managing finances easier. At least knowing what your regular paycheck amount will be allows you some certainty to plan. However, being self-employed can be a lot trickier when it comes to bugeting.
The reality of owning your own business business comes with uncertainty of income. Uncertainty translates to challenges for personal financial management. The essentials remain the same, but not knowing your actual income can be much more difficult to planning your budget.
Make A Standard Budget
Star with your expenses. If you know what your expenses are, such as rent, or mortgage, car payments, insurances such as car, health and life, along with your standard living expenses such as food and utilities, you will at least have a guideline of what you need to budget for. This also includes obligations such as taxes, repayment of loans, business insurance costs; and essential investments. This is the minimum income that you need each month.
Cut out the flab in expenses as much as possible. Avoid discretionary expenses and savings for goals that are not essential to your financial security till your income stabilizes. Once you have had time to establish your business and stabilize revenues, consider expanding your personal income.
Plan for you personal budget but also consider a separate budget for the business. Listing all the essential business expenses, including the income you have set for yourself, will give you the target revenue you have to work towards for your business necessities, advertising and more. Always try to maintain separate accounts for business and personal income.
Make sure you have the necessary savings, insurances and plans that you would if you had standard employment. These include health insurance, life insurance and retirement plans. Determine the savings you need for retirement goal and make it part of your budget. Then contribute to your retirement account and don't touch it.
There may be periods when you may have to draw less than what you have earmarked as your income if the business revenues are low. The emergency fund will provide the cushion in such situations. Go beyond the 3-6 months that is typically prescribed and aim for a larger fund. Greater the uncertainty in income, the larger should be the emergency corpus.
When owning your own business, there may be times when you have to dip into your emergency fund, especially if business revenues are low. The emergency fund will provide the cushion in such situations. Go beyond the 3-6 months that is typically prescribed and aim for a larger fund. If you can even build a simple business fund, that can sustain your business for longer periods of time, that is even better.
Draw on this only when the income available falls short to meet essential needs or in times of emergency. Be disciplined about the use and refill as soon as possible. When you have larger revenue amounts, contribute more. This can help you to avoid a panic situation for your business.
Know Your Risks
Another risk is overestimating income and underestimating expenses. If you need to do the opposite. Overestimate your expenses and underestimate your income. It will help your business in the long run.
A great option is to have an annual target rather than a monthly one. This way you can make up for low saving months in months where the income is large. It can also help you to set monthly, semi-annual and yearly goals to ensure that you are staying on track with your targets. Review and monitor the financial situation both personally and for your business so that you can make suitable adjustments to your expectations and actions.
You should also always be realistic when you are self-employed. Owning a business can be tough, particularly financially. Things take time when you are self-employed. Very rarely are businesses successful right away. With proper planning and realistic expectations you are setting yourself up for when things don't go as planned and you will be even more overjoyed when things go well. The rewards are often much greater than the risk and well worth it.