Why Salary, Savings and Taxes are the 3 Most Overlooked Numbers by Solo Business Owners

by | Aug 27, 2018 | Money

Why Salary, Savings and Taxes are the 3 Most Overlooked Numbers by Solo Business Owners

by | Aug 27, 2018 | Money

When it comes to starting a brand new business, the excitement of the opportunities and possibilities are contagious for an entrepreneur. Creating a fresh new logo, designing business cards, sitting on the edge of your chair waiting for your website to take over the internet and letting the world know you are open for business is what gets us up every morning. After a while, though, the honeymoon phase starts to wear off and things become more serious. Having to find new clients, following sales funnels and keeping an ever watchful eye on the bottom line, keeps us up most nights.

 

According to a survey conducted by Fundera, 30% of small business owners take ZERO salary and when it comes to paying taxes, anything from deadlines to lack of funds gets in the way. The question is why? With so much focus put on the ‘doing’ of the business, it is easy to gloss over taking a salary to cover personal expenses, protecting your business from an economic slow down and having enough money to pay taxes at the end of the year. In order to run a well rounded business, it is crucial that solo business owners pay attention and stop overlooking the obvious… the numbers!

 

Yes. You must take a salary… no matter what!

Just because you started a business does not mean the bills from your personal life disappear.

Who is paying the rent?
Making sure the kids have food to eat?
How are the bills being paid?

After being in business for over 4 years, working with solo business owners who are coaches, consultants and freelancers, it still amazes me that most rarely take a salary… if they ever take one at all. The usual push back from this idea of having a salary is “I am not making money so it does not matter” or “Maybe later if I can make it work,” but at the same time their business accounts are being drained to fund dining, shopping and vacations. These are also the same people that are clueless as to why their business is not doing well year after year.

In order to not stay in this cycle of feast and famine, you will have to get real with what is needed to keep your home functioning financially while running a business. Additionally, you must step up to the plate to do what is needed for the business to make money in order to give yourself a salary. In the meantime, if your business is not enough to pay you a full salary, creating a system to ‘practice’ being paid as an employee is simple.

For every new client that pays you, take 50% of that revenue and put it into a bank account called ‘SALARY.’ As a solo coach or consultant, your overhead expenses should be as low as possible, for as long as possible in order for you to give yourself a salary at the same time. Once you have set this up, on the 1st and 15th of each month, write yourself check (or direct deposit) $5, $10, $100 until you can take home exactly what you need. Having a salary boosts your confidence around our business and gives your family a marker to know that you are not wasting money, but contributing to the household.

Having funds to cover an economic slowdown is crucial.

With most solo business owners, the focus is on today and the right now. Very few, self included at times, have the brain power to look very far ahead when we are bootstrapping and looking for the next sale. But not having a financial plan in place for when the economy takes a dive, clients go MIA or when emergencies flare up can destroy even the best well run business. To overcome this gross oversight, it is important to implement a system of consistent savings. Having savings in place for times like this also helps to not be impulsive and start overspending on things your business does not need… or just making poor decisions overall. When your head is clouded by potentially stressful factors knowing which direction to go in can be a struggle.

“I don’t typically take on clients in that headspace. It’s a waste of time for both of us. Wrong mindset to be successful. No direction or clarity means poor results.”
Heather Coughenour, COO Damn Good Copywriting

To get pass the clouded judgement and potential overspending, just as with the ‘SALARY' account, you will create an account called ‘SAVINGS.’ Every time a new customer or client pays you, or you import your monthly totals from online sales, take 20% of that revenue and move it to this very special savings account. Now just imagine, when your business hits a slow patch, you will now have money to cover salaries, pay the bills and to ease stress, panic really, when business seems scarce. When you have taken the steps to protect yourself, this is a great time to evaluate resources, re-imagine your products, and do some much needed goal reviewing until business picks up again.

 

BTW… Taxes do happen…

The final nail in the coffin when it comes to solo business owners and some of the numbers that get overlooked are taxes. Many equate taxes to write-offs, something not worry about, or assume their accountant will take care of everything. Hmmmm… insert big sigh. When it comes to taxes, they can humble even the smartest business owner because of ever changing laws, minute details, and mazes of rules to follow. If you choose to ignore tax planning for your business, you will get hit with payment penalties, late fees, garnishments, and huge tax bills that may take years to pay off… or flat out ruin your business and personal finances.

If you don’t want to give all of your hard earned money to the tax man… and the bookkeeper for looking at your old records and your accountant for having to do back work… (oh, yes this adds up FAST), then you must start planning now rather than later. Having regular planning meetings with your trusted financial team is the best way to avoid the challenges of taxes.

For now, if you are new or your financial team consists of… just you, the same system of preparing from before can be implemented. Create a bank account called ‘TAXES’ and put 15% of the revenue you have earned in this bank account. This helps you plan for quarterly and annual taxes and helps you avoid looking like a deer in headlights when you get hit with a tax bill. Also, if you still insist on doing your own bookkeeping or tax prepping, please setup a consulting session with an accountant so that can help you plan and avoid surprises later.

 

Overall, the rose colored glasses of running a business can sometimes make us overlook some of the most important elements of business… the money side of it all. Remember, business is a numbers game and if you are choosing to not pay attention it can come back to hurt you in the end. The best steps to take are to get ahead of your numbers versus reacting to them. Create a CFO day where you only focus on the money of your business. Start implementing systems to cover your taxes. Create a savings plan to take care of your business during slowdowns or economic down turns. Finally, give yourself a salary. You still have a personal life to manage and this is on the of the best markers to show that your business is on the road to success.

 

Take care and happy budgeting!

 

 

 

 

P.S. Want more? I got you covered! If you are needing a few more strategies on preparing for taxes, saving money for a slow down and giving yourself a salary, check out a few shows from Ask the Budgetolgoist that go a little deeper on the topics:

What to do When Business Slows Down – Episode 362
At some point it happens to us all… business slows down, but how you react to it is key. Instead of panicking let's talk about ways you can re-imagine your products, clean up your back office and do the thing we all hate… doing some strategic sales calls!
WATCH the show or LISTEN to the podcast

How to Give Yourself a Salary as a Solo Business Owner – Episode 359
On this show, I stepped through some of the many challenges that business owners find themselves in when they ignore taking a salary. From constantly draining the business finances to starting a cycle of debt to knowing what it takes to keep your home alive while growing a business, my goal is to get you think and keep the numbers in the forefront.
WATCH the show or LISTEN to the podcast

Should I Save 30% or 15% for Taxes? – Episode 366
In the end, when you decided to become a solo business owner, you also decided to become your own CFO. Running away from the numbers or living in ignorance will not help you. Start paying attention and know what you need to do keep your business running smoothly!
WATCH the show or LISTEN to the podcast

Phylecia Jones

Phylecia Jones

Founder | CEO | Speaker | Writer | Lightweight Adventurer

My mission in life is to see the world and sprinkle some magic on it to help inspire and change it! My fun day job is spent helping solo entrepreneurs get smart with their money so they can achieve their dreams. When I am not writing, speaking, or leading workshops, I love to travel and see different parts of the world!

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