Is your business doing well? Do you look at your business bank account and see a positive number most of the time? Good for you! That’s a great feat in itself as a business. Now, have you decided what to take for a salary? Or, do you say, “It’s all my money so I consider it all my income to spend?”. I’ve been in the finance field long enough to know most start out feeling this way. I get it! You work hard, why should you restrain yourself to your hard-earned money? However, to successfully grow your business and tax plan for your future, you need to be on a budget. Here’s why budgeting for your business is key.
Business Budget Mindset
First, let’s work on your mindset. You must view the business as separate from you. Not something that you own, but who you work for. The business needs to survive and to grow. It needs money to do it. So, how much money can the business afford to pay you?
This question worries most business owners. The thought of going back on a set paycheck each month reminds you too much of working for someone else. That is probably one of the reasons why you started to work on your own, to begin with. Also, you can’t bear the thought of having money in the business bank account that you can’t have access to. Remember, taking a consistent, budgeted salary will only help your business grow! Budgeting for your business is key.
Let’s Project Your Business Budget
Each year, I sit down with my clients to discuss budgeting for their business. Basically, what they can live on. Not what they want to live on. We project business income for the present year and set a salary. This includes not only your salary but your budget at home too. We budget what you truly live on to save as well as plan for the future. If there is surplus cash at the end of the quarter or year when we review again, that’s fantastic! We can then discuss doing something productive with that surplus, like taking some distributions.
This may sound harsh, but I don’t want your business to ever be in a position where you can’t pay your estimated taxes- quarterly or yearly. That’s why budgeting and tax planning is important.
Real Client Business Budgeting Example
A former client had the estimated tax issue discussed above. Let’s call him Joe! He started with us as a small business not making much. Then, due to a booming economy, he grew it to a six-figure profit. We did all the tax planning we could to bring down the profit to lessen the tax burden. We scrubbed those books until there were no other deductions to legally take. I asked Joe to put some money into a SEP or 401k (retirement-focused accounts) to save for the future and defer the tax. Nope! Joe wanted the money. There were several large expensive trips he wanted to take with his wife. He had worked hard for this and wanted to live it up! They were getting used to the new income. After not taking my expert advice to save, budget for your business and send quarterly estimated tax payments to the government, Joe became infuriated with his tax bill. I asked him why he didn’t take my advice all year long? It seemed, in his head, that he was still living in the past when his tax bill was small, and he couldn’t wrap his head around that he could ever owe this much in taxes. You see, Joe took $200k out of his business but still wanted to be taxed as if he was taking home $20k. Unfortunately, the more you make, the more you owe! Therefore, it’s important that you plan for your taxes better to avoid a major wake up call in the future.
Unfortunately, Joe couldn’t be saved. The tax bill hit and he didn’t have any money to pay it. He angrily took his information to another accountant who gave him the same bad news. Now he’s stuck in a payment plan with the IRS as they are assessing hundreds of dollars in penalties and interest. The worst part is that this year his business isn’t doing as well either.
See how budgeting for your business is key? I know setting a budget isn’t fun, but it will save you in the long run! Business income goes up and down with the economy. Planning a budget right will have you riding those waves to financial freedom. Interested in creating a budget for your business this year? It’s never too late to start! Give me a call to get started here.