Giselle Ugarte, Online Performance Coach and Speaker.
I’ll admit it.
When I left my full-time job and went off to start a business entirely on my own, I was clueless about money, specifically when it came to running a business.
My primary goal was simply to be able to generate a very specific six-figure cash number that exceeded my cushy salary combined with the many side hustles I’d balanced to eventually get to this point of fully committed entrepreneurship. What I didn’t quite understand was the very distinct difference between revenue and take-home pay—more importantly, the multitude of expenses, overhead costs, tax items, and pricey surprises that are all just basic fundamentals of being your own boss.
To save you some time, potentially a lot of money, and perhaps a fall-on-your-face and/or check-bouncing moment of humiliation, here are three lessons I wish I’d learned sooner.
1. Start paying yourself from your own business (and on a schedule)
One of the smartest decisions I didn’t know I made was buying my home prior to leaving my full-time job. Why? Because when applying for loans on a personal level, typically a loan officer is going to look at your last two years of financial statements. Even when we expanded into the East Coast, and I applied for an apartment in New York City, my building manager needed at least three months of pay stubs to prove my financial credibility. If you’re simply giving yourself a percentage of revenue each month or pulling an owner’s draw from the business account whenever seems convenient for you, that’s not going to the type of consistency needed to be a primary candidate for financial trust.
So, how do you pay yourself as a business owner?
Start with the essentials. Calculate all of your basic human needs. Think: rent/mortgage, utilities, groceries, etc. Multiply that by 12, and that can now become your annual salary. Divide that number by 24, and that’s how much you should pay yourself (whether it’s formally into a payroll system or physically writing yourself a check) twice per month. You can give yourself a bonus at the end of the quarter or at the end of the year. But by limiting yourself to this bare-minimum amount, it will certainly help you with our next point, which is…
2. Start saving early and have emergency funds for your business
Your business needs to have a “rainy day” fund, especially if you’re the only full-time employee and/or if the business needs your physical presence to operate from day to day. At some point, you’re going to need to take a break from the business, whether it’s for planned time off or something unexpected, like an illness or an emergency. Something is also bound to go wrong, like an equipment repair or a sudden pause in sales. Also, taxes. That’s a very real thing.
So, how much money should a business have in savings?
You can pull from what I shared above and/or you can start taking even just 5–10% of every transaction and putting it into a savings account. We actually have multiple envelopes within our business checking and savings accounts that allow us to physically see categories of what we’re saving money for, whether it’s the rainy day fund, payroll, company outings, charitable giving, and more.
3. Start tracking your profits and losses
This was actually something I learned as a freelancer in my early 20s, but I started to see it creep up again with the start of my business. My “big picture” goal with money was simply to never have to worry about it. That was in reference to the days when I was fresh out of college, sometimes seeing my checking account with double or even negative digits, and vowing to work so hard that I wouldn’t have to fear a check bouncing or a credit card being declined ever again. As I became more successful, however, I also began to spend more money, on both people I loved and unnecessary nice things. I thought that the key was to work even harder to generate more income. But, as I learned the hard way, even when making six figures per year, I would find myself just as broke as when I was actively refreshing my checking account in those very early days. No amount of money will cure a spending problem.
Learn what a P&L (profit and loss) statement is, and start implementing it now
Categorize all of your expenses, check your credit card statements each and every single month, and know where every single dollar is going. Even if you get to a point of being able to hire a bookkeeper and/or accountant, you, as a business owner, should know exactly where you stand at all times.
I could go on and on, but we’ll stop there for now and let you get to work. Were these tips helpful? Were you nodding your head at any point in time thinking "OMG, that’s me" while reading this? If so, leave a comment below and find me on the socials *tag giselle ugarte*. For more tips like this, Nationwide is on your side.