(originally posted on Maker’s Row blog)
All truly successful business owners understand that their success is based on a simple equation: When revenues are greater than expenses, the difference in the two numbers is profit or earnings. Many companies appear to be turning a profit on paper in complicated reports and quarterly earnings, however, what actually goes into the bank account determines if a business makes it through the next month.
What about if we thought of our personal finances the same way? Here are 4 ways to manage your personal cash flow like the boss that you are:
1. Smooth out your personal income.
A lot of new entrepreneurs will just take distributions when they feel like they “need” them to cover their personal expenses. This often leads to losing track of how much money you actually spend each month, which usually means you end up overspending.
If you’re in a situation where you’re not using every dollar left over from the business to pay for your personal stuff (and congratulations, that is awesome!), the best way to manage your personal cash flow is to give yourself a regular salary. By setting up a regular distribution every month, you’ll be able to mentally separate your business and personal finances, which not only helps maintain your sanity (very important!), but will also give you clear benchmarks on how the business is growing.
How often should you pay yourself? The typical time frames to give yourself a salary are weekly, biweekly, and monthly. Since you’re the boss, it’s up to you and you can base it on how often your business gets an influx of cash and your personal level of self-control. For some people, having a month’s worth of income in their bank account could be a disaster for their budget!
How much exactly? There are a number of things to consider, including how regular your business cash flow is, what your current budget is, and if you want to build up savings on the personal side or keep more money in the business. To get an initial number, figure out your monthly living expenses and add about 10-15% to account for some wiggle room. As your business grows, remember to give yourself a raise too!