Getting Your Business Finances In Order

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Welcome back.

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We're going to talk today about accounting systems.

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If you to profit first, the anti budget and how you can simplify your

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finances and how to calculate what your business should make, based

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on your personal financial needs.

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So buckle up.

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This is going to be a really, really information heavy episode.

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So pause relisten, come back to it and take some notes because it's a lot.

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Okay.

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Number one, we're going to start with how to calculate what your

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business should make based on what your personal financial needs are.

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So it's a really long way of saying let's reverse engineer, your business income

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and your business sales to support your life personally, because the majority

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of us may love what we do for business.

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I certainly do, but I got into business to make money.

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And to support my livelihood and my lifestyle.

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So I go into this in so much depth and there's even like a little calculator

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worksheet for you and my get your financial shit together course.

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But we're going to walk through this verbally.

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And I want you to say, we're going to use an example.

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You go in and you're going to add up all of your personal financial.

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Personal again.

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So like rent, mortgage utilities, car insurance, car payments, student

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loans, credit card debt, whatever you have that are required, like

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all those payments per month, add them up and then add 20% to that.

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The reason that I recommend you add 20% to that is because.

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Myself included.

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We tend to chronically underestimate our actual expenses.

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We all tend to be like major optimists when it comes to that.

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And that's just not the case.

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99% of the time.

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So add that 20% and for a buffer that also accounts for my car broke down.

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I had an unexpectedly high month.

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I had family come visit and my food bill was significantly higher.

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Or maybe you go buy clothes.

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Cause most of us don't think the budget, those things in, but there

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are absolutely things that you pay for maybe a couple of times a year

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that you're not thinking about.

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So we're going to use this example.

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So your personal monthly finance expenses are 5,000.

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We're going to add 20%.

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It's another thousand dollars.

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So your personal financial number is $6,000.

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Okay.

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So what does your business need to be making as a starting

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point to support $6,000?

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The answer to that in general is $12,000.

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So you take your personal finances, you add 20% to that, and you double it.

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Reason being.

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Cause we're working backwards.

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I recommend taking 50% of your business profit for your personal expenses for

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your personal income for your owner's pay.

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So what we just did was take what you needed personally and flip it.

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Okay.

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So we now have our number, right?

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You need to be making $12,000 a month in your business and sales to have

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on average, $6,000 to pay yourself.

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This gives you a really good starting point.

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Is this always.

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No, this is not always going to be accurate.

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Maybe you're an e-commerce business.

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Maybe you're an agency or you have really high expenses or

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you're taking less than 50%.

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This is meant to be a starting point for you to be able to

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forecast what you need to make.

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So maybe you're looking to leave a day job.

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Maybe you have a spouse or a partner that, you know, you're looking to

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support while they go full time.

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Maybe you're looking to, you know, move out of a situation

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that you're in right now.

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This lets you plan accordingly so that, you know, you're making

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enough now by doubling that number that you need personal.

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That gives you 50% for yourself.

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It gives you approximately 25 to 30% for business expenses.

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So about $3,000 a month, and it gives you the remainder of

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that for taxes and retirement.

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So by setting aside 20% on the low end.

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I really recommend 25% wherever you can, especially if you're in a higher

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income state, you then can get to the end of the year and you should have some

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money left over in that tax account.

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Now we're going to talk about the F-you to profit first.

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I think that profit first is brilliant on the surface.

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I think it is a damn nightmare and execution for the

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majority of business owners.

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So profit first essentially recommends, and we're gonna

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start with the baby level.

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Okay.

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It recommends you have different accounts or different buckets,

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basically for different things.

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So you have an income, you have profit, you have operating

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expenses, you have taxes.

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I think you have owner's pay if I'm remembering correctly.

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And the recommendation is that you open checking accounts for

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each of these and you portion out your income and your expenses and

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your money into those accounts.

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So a certain percentage, you know, maybe 50% goes to you as owners

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pay you, pay yourself out of there.

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A certain percentage, like 1% goes to profit.

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Great.

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You pay yourself that.

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I love the concept.

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I think it is so over complicated, and I've seen it fail with a lot of

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business owners that I've worked with because a lot of the business owners

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that are interested in profit first are looking for control over their finances.

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Right?

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You want control, you want to know where your money's going.

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You think of the system and you're like, oh my God, that's perfect.

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Like, and it makes sense.

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Right?

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The reality is for a lot of those business owners that are looking for control,

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they don't necessarily have the income to support the profit first breakdown.

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What I mean by that is if you're not currently able to live on 50% or less of

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your income from your business, then if you need to portion 50% into your owner's

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pay account, but you actually need 60%, you need to adjust your percentages

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or you need to increase your income.

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So instead of putting money in all of these different accounts and

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then having to move money, cause that's what I've seen happen.

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So one, it can make your accounting more tedious and easier to mess up,

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especially if you're doing it yourself, because you have all of these accounts.

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Every time you move money into one of those accounts, a transaction has created.

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So let's say that you do it maybe once a week and you split every

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single one of your payments up according to these percentages, you

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know how that going to every single one of those accounts, that's fine.

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But then you're not actually set up

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to be using profit first because maybe you're not making

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enough in profit right now.

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Maybe you're not making enough in sales right now to be doing this system.

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You then end up having to move that money back into your account, then be able to

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pay yourself or be able to pay bills.

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So you've now duplicated those transactions when they didn't

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need to occur in the first place.

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So what I recommended instead is that we simplify it.

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I recommend one checking account for your business, one savings

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account for your business, and one credit card for your business.

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And actually recommend something pretty similar on the personal

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side plus retirement accounts.

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So with those, all of your income comes into your checking account.

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All of your expenses, humanly possible.

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Go out on your credit card and you move a portion over for taxes and

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retirement to your savings account.

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This gives you more flexibility.

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It decreases the number of transactions for accounting purposes, and it

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helps if you do have a month where maybe cashflow is not great or

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you're needing to move things around.

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You're not getting a hit by fees and accounts.

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I had a client once that had profit first set up with Wells Fargo,

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Wells Fargo charges, $10 a month per business checking account that dips

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below an average balance of $500.

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She hit a cashflow crunch due to unforeseen circumstances, and she was

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being hit with $50 of fees for those five accounts every single month,

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because she had them all set up.

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So.

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Checking savings, credit card.

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The reason I recommend a credit card is because you're able to a

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earn points, be it comes with better fraud protection and see for any of

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us that travel for business, there's additional travel perks as well that

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normally come from most credit cards.

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The best part of that is if you get a business credit card that is aligned with

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whatever one of your personal credit cards is, you can generally transfer points

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or miles or rewards that you earn with the business to yourself, personally.

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With no tax issues coming up, which is really exciting.

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So I definitely recommend doing that because then you can use those personally

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for trips to redeem them on your end, you know, whatever really excites you.

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So business savings, how much do you need to be saving?

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This is probably one of the top five questions I get asked.

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How much do I need to be saving for taxes for retirement, for emergencies.

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So we're going to talk about just the business side of things.

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In general, I recommend 20 to 30%.

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I really like if you can be setting aside 30% of your business income

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for taxes and retirement, that will almost always guarantee that you will

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have leftover at the end of the year.

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Assuming that you have leftover at the end of the year.

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Number one, celebrate.

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Yay.

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Um, number two, I then like to take that and do two things.

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Sometimes three things with it.

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Number one, contribute more to retirement or contribute to

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retirement if you haven't done.

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So number two, upgrade any equipment that you had been putting off.

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Number three, treat yourself.

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I think it's so easy for a lot of us to get focused on, oh, it's a business.

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Write up.

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It's a business.

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Write off, it's a business.

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Write off.

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I'm going to get these things for the business.

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I'm going to reinvest in the business, but we don't take care of ourselves.

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Take this time to take care of yourself and also be fiscally responsible.

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So retirement contributions upgrading the equipment that truly needs to be upgraded.

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And then treat yourself with your leftover tax.

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30% is going to feel like a lot.

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And actually in our next episode, we're going to talk about taxes, quarterly,

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estimated taxes, annual taxes, payroll taxes, maybe even sales tax.

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We'll.

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We'll probably touch on that just a little bit, but I want you to understand

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that you need to have a plan for the money that you need to be making.

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So if you know, I need to be making this money.

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Okay.

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You know what?

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You need to be making your business.

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Now we're gonna use that same example from before.

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You're going to take that $12,000 that you can do, making

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your business and break it out.

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If you're a photographer, how many weddings is that?

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A month?

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Is that four weddings at 3000 a pop?

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Is it three weddings at 4,000 on average, is it two weddings at

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4,000 and a couple of branding sessions or engagement session?

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There are so many different ways that this can work out, but it then

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gives you a plan so that you can work backwards and plan your marketing

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and your outreach accordingly.

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Because you know, you're not just running in the dark here

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trying to get all the money.

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You can make all the sales you can and making more than that.

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$12,000 is absolutely fine.

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But again, you know that that's your baseline for how to be pricing yourself.

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And you have to take into consideration that if you're doing something

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hourly, maybe you're a VA and maybe you are pricing your services hourly.

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Again, we go into this in my course, get your financial shit together.

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Self study course.

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I have a whole thing for how to price yourself hourly based

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on what you're wanting to make.

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You don't base your hourly on full-time hours.

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You are not an employee.

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You're a business owner.

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All of your hours are not billable.

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So what I normally recommend is about a 20 hour billable week

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15, ideally, but 20 normally when you're getting, getting going.

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So what that would look like, let's say we're going to use

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that $6,000 example again.

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Okay.

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And I'm actually going to pull up the calculator while we're here.

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You need $6,000 per month.

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You need 12,000 in your business.

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What does $12,000.

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Divided by four weeks.

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And I'm going to tell you why we're using four weeks in a month, even though there's

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more than four weeks divided by 20.

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So that comes out to $150 an hour.

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If you're working 20 hour billable weeks.

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So for $12,000 a month, And business revenue.

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If you're an hourly, you know, VA something along those lines,

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you need to be aiming for packages that are $150 an hour.

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If this feels really high, I encourage you to either work with a coach to

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get additional certifications, to review your packages, to offer a

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higher value service where needed.

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Now, the reason that I recommend 20 hours.

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Is because 40 hours of billable work per week is a lot.

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That's not including time that you spend invoicing your clients time,

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that you spend marketing, time that you spend, you know, potentially onboarding

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clients, doing your social media, doing your admin, communicating with a team.

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There are all of these things that go on in the background.

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Writing blogs, writing social content, doing tick talks, doing

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reels, all of this takes time.

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And you you're, you're not able to build these to clients unless you're doing

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social media management in which case.

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Sweet.

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Um, so you need to think about that.

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You could probably go as high as 30 hours, especially when you're getting started.

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Just be really careful because it's super easy to burn out.

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And just for this example, 30 hours week, When you need to make $12,000,

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right before room divided by 30, puts you at a hundred dollars an hour, and

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also keep in mind in this hourly rate.

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This is your sick time.

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This is your PTO.

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This is your health insurance.

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This is your retirement.

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This is everything.

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If you were working with a client as a contractor or as a business owner,

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you are not being paid as an employee.

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Your hourly rate is going to be high.

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So you can expect easily if you were making 20 or $30 as an employee in

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a role to double, if not triple that rate as a contractor, because you have

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additional expenses, including income taxes that you're now responsible

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for paying that the employer is not responsible for playing or the, you

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know, client that you're contracting with now is not responsible for paying.

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So.

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These numbers may feel high, but you really need to take into consideration

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what all is factored in there.

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And that takes us to why I recommend basing it off of a four week month.

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So a four week month leaves us with four weeks a year unaccounted for

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because most months are like 4.3 weeks.

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So by working on 28 day or four week month, this builds in four weeks per

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year of paid time off, essentially.

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So we're not counting those weeks in here.

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That's sick time.

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That's personal time.

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That's holidays.

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That's non-billable days that are already built into your pricing.

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So again, these numbers may feel high, but you need to be realistic when

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you're looking to scale your business.

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And I work with a lot of wedding photographers, videographers

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and photographers in general.

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Keep this in mind when you're looking at billable hours.

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And for any of you looking to book a wedding vendor, remember that when they're

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there for your day for your session, that is a very small part of the overall.

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Client experience that they're curating.

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So yes, you go there, you capture the photographs you capture, the moment

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you then go back, you backup all of your photos, which can take some time.

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You then most times do sneak peaks or previews you then cull, edit, and deliver.

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And in some cases, design albums and all of that.

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The same amount of time, if not more, that it took for the actual events.

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So keep in mind that when you have someone and again, if you're a

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photographer, your billable hours are what it takes you, and you can do this

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when you're building your packages.

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If you're doing an eight hour.

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And that eight hour package includes an additional eight hours of work.

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Your billable is actually 16 hours.

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So you need to take into consideration in this example you would want to do

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16 hours, times that $150 that we were looking at, which would be $2,400.

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$2,400 in this case would be your middle.

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Starting package for eight hours, that doesn't include engagement sessions.

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That doesn't include albums.

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That doesn't include anything else.

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So, I understand that you're putting, like, those are your working

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hours to make this package happen.

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And you need to make sure for anyone that works events like this, that have

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additional follow-up, or if you do maybe a VIP intensive day with someone, maybe

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you're a coach or a consultant, and you're doing this VAP intensive day.

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Is there pre-work that you're helping them with?

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Is there additional support that's coming in after the fact.

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Include those hours.

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And again, use this as a starting point.

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You are going to have to assess what the value is that you bring, what

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the market value is that you provide.

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And the specific niche that you're looking to be in.

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I have a client that's a film photographer that charges six,

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seven, 8,000 plus for weddings.

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And I have some clients that charge between two and 3000 for one.

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I'm not saying that one of them is more talented than the other.

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One of them works in a different niche than the other one of them, you

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know, is doing film versus digital.

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Like there's a big difference in the markets and in the

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marketing that they're doing.

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So picking what you're wanting to do, picking the type of customer

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you're wanting to work with.

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And most importantly, making sure that you're pricing.

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Is aligned with a what supports your lifestyle and what

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your business needs to make.

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And B that you're not under pricing your services because the majority of

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us absolutely under price our services.

Katelyn Magnuson: 00:20:12

Okay.

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This is gonna be a little bit longer episode than normal, but I want to

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talk about systems automation, the anti budget, and how we can simplify.

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So this leads into what we were talking about beforehand.

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When you're moving money over to your tax account, to your personal

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account, I want you to think about how you can make things simpler.

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Where can you build up a buffer in your account?

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Maybe you pretend like your checking account, maybe $0 for

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your business is actually $2,000.

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And you don't dip below that in there.

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You've set a buffer in there, but that also lets you know, you can

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set up some bills on auto pay.

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Maybe you have, you know, a contractor that you pay regularly.

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What can you do so that you're having to pay bills and do less admin work?

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What accounting software can you set up so that you are able to do a

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little bit of work on the front end?

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Make sure your chart of accounts, which is your category.

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It's set up appropriately, you know, how to use them and you're able to set

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up automations and rules so that you're not having to go through at the end of

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the year, which been there, done that.

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I'm sure you probably have to.

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Um, but instead at the end of the year, you're able to pull your

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reports from your accounting software and like be ready for tax time.

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It's seriously magical.

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So where can you be doing things to set yourself up for success?

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Like accounting software, like automating your money, like doing

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an anti budget and an anti budget is exactly what it sounds like.

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You essentially set up all of your bills to pay.

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And then you are left at the end of the month or the end of the pay period or

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whatever with what your fun money is instead of spending and setting money

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aside for each of these categories, you basically can pay that money

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out, automate your bills, and then Yolo with the rest of what's there.

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And to me, at least it feels a lot more expansive and much less restricted.

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Then traditional budgeting, which my ADHD ass never, ever could stick with

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for more than like a month or two.

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And then I felt like a failure and then there was a shame spiral, and

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then I went into it all over again.

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So for me, automating my budgets, automating my money, automating my

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business and my finances, wherever I can has made such a big difference

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a in my earning capacity, but B in the accuracy of my numbers and

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the reduction in stress com tax.

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And I think so many people struggle with this because we get all of this

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messaging, you know, you're, you're lazy, or why can't you do this?

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Why can't you make it work?

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Like budgets are what you need to do in order to have money.

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You need the budget to be rich.

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You need the budget to pay off debt.

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You can't have debt.

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How dare you.

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Um, debt is bad and it's just this constant spiral of like

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shame talk and shit that goes on.

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And I think that for so many of us, this is hard because you're getting these

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mixed messages and you're being told that you should be able to do this.

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And other people can do this.

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And they paid off 36,000 or 50,000 or 80,000 in student loan debt in two years.

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Here's how you can do it by just budgeting.

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It's okay.

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If that doesn't work for you, there are other ways, especially if you're

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a business owner, especially if your earning potential is more untapped.

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You are able to set up these automations so that your money can work for

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you instead of you having to cram a square peg into a round hole and make

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yourself fit in a budget or work in a budget when it's not working for you.

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Cover all of this in my course, get your financial together self study course.

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The calculators that I mentioned in here are there, the pricing tools are in there,

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both for service-based and for product based or e-commerce businesses, because

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those ratios look a little bit different.

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And how does that appear accounting software?

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How to do your categories?

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Well, what the taxable categories are, how to do the anti-budget,

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how to do this breakdown that I explained with the retirement, the

Katelyn Magnuson: 00:24:27

checking, the savings, it's all there.

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So if you want more and you want to give this a try, because regular

Katelyn Magnuson: 00:24:34

budgeting hasn't worked for you.

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You're tired of getting to the end of the year and having everything.

Katelyn Magnuson: 00:24:40

Knowing that it's looming at the end of the year when you get there is exhausting.

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So instead of having that happen, make this the year that you kick

Katelyn Magnuson: 00:24:49

the year off and you don't deal with that ever again, you never have to be