If you’ve been following along in the small business budget series then you’ve already learned:
- Why you need a small business budget and how to create one in 5 steps
- What categories you need to considers in your budget
Now it’s time to learn what the business budget percentages breakdown should look like in your small business budget. Why? Well, despite the fact that I tend to rail hard against set percentages in a budget they can, at times, be very useful guidelines when it comes to business (personal finances are a whole different matter and you can read my opinion about that here)
Small Business Budget Percentage Breakdown: How to start
First, it’s important to start with the fact that you are basing your small business budget percentage breakdown on the percentage of total revenue earned from your business, not after taxes, not take home pay, okay?
Frankly, if you start with the wrong number this is all for naught. How do you calculate the total revenue of your business? Well it’s easiest if you are working with a business budget calculator like the one I have built for you in the FREE Digital CEO’s Guide to Financial Freedom because it does ALL the calculations for you.
Make sure you are using all your revenue streams and total those up! I like to use the annual numbers and then look at the monthly as well.
Small Business Budget Percentage Breakdown: Expenses ≤ 40%
This is probably the only time you’ll ever hear me say this (or write it…you know what I mean). Your expenses should NOT be more than 40% of your overall revenue. For real, this is not like in your personal life where sometimes rent/mortgage payments are just large based on where you want to live. You have every opportunity to create the business that you want and keep your expenses under control. If you want your business to survive in the long-run you need to keep your expenses equal to or less than 40% of your overall revenue.
There are multiple ways to do this:
- Eliminate things you don’t need to pay for – don’t get hung up on your ego here, you don’t NEED your business to look like anyone else’s you need it to make money.
- Find lower cost alternatives – are you paying for more than you need from a service provider? Consider downgrading.
- Bundle services together with a provider so that you can save money – this is the very reason that I switched from multiple hacked together softwares to Kartra because it does so many things and by the time I combined the “low” cost of all those other things (plus the Zapier fees to connect them all) Kartra was cheaper too.
The most frequently overlooked way to make sure your costs are staying low? Making sure you are charging the right prices!Sarah Blanchfield
If you are undercharging then ALL of your numbers will be unsustainable. Bottom line. This is why I harp so much on getting your pricing structure right! Working on your small business budget percentages is a waste of your time if your prices aren’t priced for profit. If your pricing is wrong, nothing else works. (If you want to check on whether your pricing structure is set up correctly read more about how you can tell here).
Small Business Budget Percentage Breakdown: Taxes ≅ 30%
There is a rule of thumb that you should save around 30% of your total revenue for your taxes. Including taxes in your small business budget percentages is one of those categories you absolutely can’t skip and if you get it wrong… whoa to you. If you are just starting out and have no idea what your tax rate will be you have two options.
- Talk with a CPA: Talking over your financial situation with a professional is the most accurate way to determine your tax rate plus you can start building a relationship with them and see if you want them to permanently help with your taxes and filings.
- Use the 30% rule: You can go it alone and save 30%, file quarterly taxes on your own and hope for the best.
I’m biased. You can tell. I talked with a CPA because I take NO chances when it comes to my taxes and we determined my percentage rate and now discuss adjustments as my income in my business changes.
Small Business Budget Percentage Breakdown: Owner’s Salary 20%ish
You deserve to be paid well for all the work you do in your small business. This should not be taken lightly. There are taxes to consider (yet another reason to talk to your CPA!). You should also be considering how much you want to/need to be contributing to your family finances in order to maintain the lifestyle you want. If you don’t know that number it will be hard to know whether your owner’s salary percentage is correct.
Don’t go thinking you can just equal your take home pay from your last job either. I see you. You wanted more than that for your life that’s why you started all this!! Again, if you need help with sorting out your personal finance contribution there is a resource to help you in the FREE Digital CEO’s Guide to Financial Freedom.
You can increase the small business budget percentages of your owner’s income in one of two ways:
- Decrease your expenses – you can maintain your same revenue and take home more money if you decrease your expenses. Cool right?
- Increase your revenue – obviously if you bring in more money the 20% increases too,
I know that thinking in percentages is not easy for everyone. That’s why when you are creating your small business budget percentages it’s helpful to use something that has all the calculations baked right in. This way you can play around with the amounts in the field and see how it spits out the numbers. You don’t need to be a spreadsheet guru either (I even made a video and give you step-by-step instructions – download it now!)
Small Business Budget Percentages: Profit Savings 10%
You need savings in your business just like you do in your personal life. Just like in life, in business sometimes there are dips and you want to be prepared to sustain your business when those happen.
Please note the word choice in that last sentence. I didn’t say “if” dips happen. I said “when”. It’s a critical mindset shift in your financial success. There are always ups and downs no matter what. Expect them. Accept them. Plan for them and when they happen it will not affect you at all.
This number can obviously be increased if you would like additional security around the dips and/or know that you’ll be taking time off for an extended period of time. The best ways to do this include:
- Reduce expenses
- Reduce owner’s pay (but not so much you suffer obviously)
- Increase revenue and put all the increase into profit savings
Small Business Budget Percentages: Sum Up
So here’s the basic breakdown if you look at the guideline percentages (again remembering there are reasons to adjust all of these).
- Expenses ≤ 40%
- Taxes ≅ 30%
- Owner’s Pay 20%
- Profit Savings 10%
The other thing you will notice is that these must add up to 100%. You should not have “leftover” money floating around in your business. It needs to be accounted for somewhere. Every dollar needs a purpose or it’s a wasted dollar.
Whew! I know this can seem like a lot but don’t forget you can get all these small business budget percentages broken down for you in the FREE Digital CEO’s Guide to Financial Freedom and use the business budget calculator that makes it super easy!
You’ve got this!