Managing Money as a business owner
How to be consistent when earnings aren’t?
Being a business owner is rewarding, but it doesn't come without challenges, especially when income isn't consistent. Is your income seasonal? Does it come in lump sums once jobs are complete? These are common realities for many entrepreneurs across many different industries.
This inconsistency can make it incredibly difficult to manage your finances. How much should you be reinvesting in the business? When do you pay yourself? How do you prepare for expenses like taxes, insurance or stock?
The Rule of Thirds
One of the most effective strategies for navigating this financial turbulence is to segment your money using the "Rule of Thirds."
The rule of thirds: A simple yet powerful framework which can help you
Add cashflow to your business to keep it secure
Ensure your business has a long-term plan so it can grow
Add value to your clients, team, and shareholders
Your Personal Finances
We often guide our clients to apply the rule of thirds to their personal finances:
1/3 for Living: Cover your essential living expenses (utilities, sustenance/living, transport costs).
1/3 for Debt: Allocate funds towards existing debts (credit cards, rent/mortgages).
1/3 for Future: Invest in your future self (savings, pensions, investments).
This framework provides a balanced approach to personal finance, ensuring you meet immediate needs while creating your long-term financial independence.
The same principle can be applied to your business finances:
The same principle can be applied to your business finances:
1/3 for Immediate Jobs: Allocate funds to cover the costs associated with your current projects and upcoming client commitments (materials, labour, stock)
1/3 for Business Expenses: Cover essential business spending (rents, rates, insurance, maintenance of tools and machinery)
1/3 for Yourself (Reserves and Reinvestment): This portion is crucial. It enables consistency in paying your salary as the business owner and allows for reinvestment in the business's growth through accumulated reserves.
So how to implement the rule of thirds in your business?
Spend time tracking your income and expenditure over at least a 12-month period. This could involve using accounting software, spreadsheets, or even a simple notebook.
Build a cashflow plan: Using data you have collected, create a detailed budget that outlines your key income and expenditures and how you plan to allocate the funds across the thirds.
Regularly review: Monitor your budget and make changes as needed. Your business is constantly evolving, so your financial needs budget will need to be flexible beyond your core or “fixed” costs.
Automate where possible: Set up recurring payments such as income, utilities, and loan repayments to ensure timely and consistent cash flow.
Seek professional advice: Consider consulting with a financial adviser or accountant to develop a comprehensive financial plan that aligns with your business goals.
Managing finances as a business owner can be challenging, especially when income is inconsistent. By implementing the rule of thirds, you can create a more structured and sustainable approach to managing your finances. This framework provides a clear roadmap for allocating funds towards immediate needs, essential business expenses, and your own well-being and the future growth of your business.
Disclaimer: This blog post provides general information and should not be considered personalised financial advice. Consult with a qualified financial professional for personalised guidance.