Fast forward with me: It’s December 15th…
You spent all year trying to make the best decisions for your business. You’ve celebrated hitting your goals and big financial wins, having a full client roster, selling spots left and right, and maybe even started getting that passive income funneling in. Not to say there haven’t been your fair share of frustrations with pushed launches and deadlines, overcommitting yourself, boundaries being crossed, and having to spend way more than expected.
It almost feels like by the time the end of the year arrives (which always sneaks up on us), you have a completely different business — you’re ready for a break, trying to keep up with the holiday madness, and feeling like your bank account needs a replenish.
Then, the inevitable happens — you’re bombarded with messaging to “spend right now! Get those write-offs accounted before Dec 31st!”
It feels like if you don’t spend money, you’re going to be rudely awakened by your tax bill. Cue #FinancialFlipFlopping
While people who are leveraging that language in their marketing tactics aren’t wrong, wouldn’t it be nice to walk through the “noise” knowing you’ve got a plan in hand, so you don’t over-invest and start the year stressed out about how to recoup the money you need to pay yourself and operate?
Well, there’s no better time than now to create one, so you can comfortably pop on those metaphorical noise-canceling Bose headphones without fear of overspending OR missing out.
Let’s start with the basis of everything: your business needs a safety net, and that starts with knowing where your money is going.
This is also a great time to get your spending plan together for the New Year if you operate your spending plan following the traditional tax year.
*Note: This is not financial or tax advice. I am not a financial expert. I recommend seeking advice from a financial professional. This article is merely about opinion and personal experience as an online business owner. Please seek professional advice.
The way we view spending is in a five-step Financial Flywheel featuring five categories.
Psst, here’s a sneak peek from Business Expansion Blueprint:
- Cost of doing business — your CEO salary, fulfillment (labor), marketing, and overhead
- Profitable pricing and clear capacity — pricing your offers, weekly offer capacity, revenue streams, and revenue allocations
- Overall business profit – combing #1 & #2 above
- Growth plan — CEO distributions, growth investments, cash in the bank
- Optimization strategies — For revenue growth, overhead, cost of services, and marketing
When you start with this process, an important precursor step is to look at your salary and the cost of doing business. You don’t want to overshoot your salary because it directly impacts your profits, and affects the tax rate you pay.
*The above is a mock scenario/made-up example. It is in no way accurate financial advice. Please seek professional financial advice.
We recommend structuring your business by paying yourself in the lowest tax bracket with a distribution goal (more on that later). Structuring your business this way allows you to build your safety net so you can comfortably take distributions versus over-extending yourself financially.
Step One: Your CEO Salary
The first part of this is to understand the money you need to fulfill your lifestyle, considering both nice-to-haves (vacations, luxury items) and need-to-haves (bills). If you can live comfortably within the means of the salary you set for yourself every month, then you don’t need to dip into any distributions to survive.
Step Two: Your Operating Expenses + Safety Net Savings
The next thing you need to do is understand your operating expenses, so you know just how much cash you need to have in the bank for your safety net. You decide if that’s 30 days, 60 days, 90 days, or even 120 days of expenses. This is ultimately where your distribution will come from.
Once you have a breakdown of your spending for your salary and additional operating expenses, it’s time to create your spending plan!
Step Three: Establishing Your Spending Plan
Your spending = your growth plan as well, so you can reinvest into your business growth. You want to make sure you’re investing in the right direction for your business. To determine your spending plan, look at the cash in your bank account (formula below).
Doing the Math…
The formula to lean into to determine just how much you can spend starts with your forecasted revenue (sales, 100%) minus expected operating expenses + fulfillment (around 55%) = remaining.
But, there is one caveat, you don’t want to pull from your first month’s profit. You want to make sure you have enough cash in your safety net (based on what you decided works best for you) for protection.
All growth budget decisions should come from cash in the bank versus overall business profit.
It’s so important to know this information because if you put your foot on the gas for end-of-year investments without knowing this (i.e. you don’t understand your profit margin and “play money”), you could run out of cash in the bank.
You don’t want to be stalled out on the road, selling from scarcity as a need to make ends meet as you enter the new year.
Reinvesting back into yourself and your business is SO important once you do it from a place of awareness and make informed decisions.
Ultimately, it’s your business, you know it best, and you can grow it and reinvest in the ways you know work for you.
Looking for a further breakdown on everything inside the Financial Flywheel and a step-by-step breakdown of how to implement all of this?
Join me inside Business Expansion Blueprint, where you’ll receive videos on financial planning, revenue roadmap projections, creating your (full) spending plan, and revenue allocations. Plus, it comes with an in-depth spreadsheet which will be your holy grail in business to keep your finances completely organized with everything from CEO salary, team salaries, pricing your offers, spending + growth plan and more.
*Note: This is not financial or tax advice. I am not a financial expert. I recommend seeking advice from a financial professional. This article is merely about opinion and personal experience as an online business owner. Please seek professional advice