You hit your goals for the month … congrats! So, how much of that hard-earned profit should you pocket for yourself?
While a big launch or a fully-booked month can leave you exhausted, it should also result in a nice bump in your bank balance. When your business starts to show the fruits of your labor, one of two things usually happens. Either you jump for joy and develop an immediate plan to spend it all or you are so worried about whether you will ever repeat your success that you hesitate to spend a penny!
Instead of taking either extreme, I recommend a simple formula for dividing up your profit each month.
If you haven’t already done so, set aside 30% of your monthly profit for estimated tax payments to the IRS and your state. Folks, there is no joy in seeing a big balance due on your tax return in April. Prepare yourself for year-end by making those quarterly tax payments! When it’s time to send in your estimated payment to Uncle Sam, you’ll have the funds to do so if you’re socking away 30% of each month’s profits.
Then, check how much you have in your emergency fund. Many experts suggest that you keep enough in your savings to cover at least six months of your basic operating expenses. You don’t want your business to fold if tragedy strikes and you are unable to bring in any new projects for several months. If your emergency fund isn’t fully funded yet, set aside 20% of your monthly profit to add to your savings.
If you have employees or valued subcontractors or a big purchase that you’ve been putting off, use up to 20% of your monthly profit to buy that new laptop or spread the love with raises and bonuses to your team. More than likely, your team is at least partially responsible for your good month. Let them know that you appreciate their contribution! If you’ve been burning the midnight oil as a one-person operation, this is the time to invest in a VA or virtual bookkeeper to help! Delegate the work that you don’t have to do while you focus on closing sales and making your clients happy!
Lastly, transfer that remaining 30% to your personal account and go have fun … you’ve earned it!
Have a question about estimating how much you can draw out of your small business? Leave a question below.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.
