Budgeting for the Solopreneur

My first job was at an amusement park in town called Fiesta Texas. I was 18 and entering the last semester of my senior year of high school. I went to a job fair and got hired for the Operations department. This  department handled running the roller coasters and staffing the theaters that featured live shows. I started out working in a large amphitheater that had a live country music show and eventually moved switched  running a huge wooden roller coaster called The Rattle. It was a great summer gig for a teenager!

Every week I received a paper paycheck and deposited it into my personal bank account. I used an ATM card to withdrawal cash. Having money made me feel like an adult! The ATM was a magic money machine, but a judgement day was approaching. I was twenty-dollar-bill-at-a-timeing myself into a hole. I got a letter from the bank saying I was overdrawn. I was shocked and wondered how this happened.

After researching I realized that I hadn’t been entering the ATM transactions into the ledger. A  silly mistake indeed, but also a valuable lesson. I learned I needed to keep good records and have a plan for my money.

Since that shaky beginning I’ve gotten better at money management, and today I find the best tool to keep me from becoming a headless chicken spendthrift is a written budget. Going through the hard work of becoming totally debt free and facilitating many Financial Peace University classes I’ve gotten very good at making household budgets.

Do solopreneurs need a budget?

I started wondering if budgeting skills translated to being a solopreneur. When I left my corporate job in 2008 I registered as a Sole Proprietor, opened a business bank account and started freelancing. For basic accounting I create Profit and Loss statements for my business, but don’t do budgets nor forecasts. I realized that’s like trying to drive a car looking only at the rear view mirror.

Since returning to freelancing and selling plugins this past January I’ve been hustling to make sure money flows in the doors. After six months I’ve been able to consistently fill my schedule and steadily increase my rates. (woot!) I decided it was time to be more diligent about budgeting on the business side.

What every budget needs

Since I’m still a sole proprietor my business isn’t overly complex. I’m not an accountant or bookkeeper, but I have seen dozens of budgets that work. I’ve gleaned a few bits of knowledge that every budget needs to be successful.

1. There needs to be a unique budget for each month. Each month is different and will bring different expenses. There will be some recurring expenses, but there are others that are either on-time only, happen quarterly or annually. Using a budget from January for September is not a good idea.

2. There needs to be a $0 at the bottom. Start at the top with the amount of revenue you expect for the month, then assign negative dollar amounts to each category until every dollar is assigned. There should be a $0 at the bottom meaning that you’ve given every dollar a name and a plan on how to allocate it.

3. The budget needs to be tracked weekly or monthly. Use any tool you want such as Mint.com, Quickbooks, Xero, or a simple Google spreadsheet. After you plan your budget make a priority to track how you’re doing on a recurring basis. If a category gets eaten up and needs more money then you need to remove money from another category to fill the empty category. Don’t reach the end of the month and find you’ve overspent in all your categories. Tracking is tedious, but will develop discipline.

4. Have grace for yourself. You won’t get it right the first month. It’ll take time to figure out what works, and you will probably have ups and downs of revenue to account for. Give yourself a large helping of grace as you get better at the process.

An example solopreneur budget

I asked some friends who are also solopreneurs how they budget and put together a sample budget plan. This is for people who are freelancers, sell products, or have client services of some sort. It’s not meant for people who have a more complex company structure with employees, equity partners, or some other situation.

For income I’ll use a sample of my weekly consulting rate of $3,000 at a 75% booking. So that’s 3 weeks x $3,000 = $9,000 per month. Another example would be if you have 20 products that sell an average of $500 per month each.   20 products x $500 = $10,000 per month.

We’ll use $10,000 per month for round numbers. I’m going to assign percentages to categories and reach $0 at the end.

Monthly Revenue$10,000
Retained Earnings10%-$1,000
Owner Equity55%-$5,500

Monthly revenue is what we forecast the business will have in income for this example.

Taxes are the only sure thing other than death. Be sure to check with your CPA on how much to put aside and if you’re in the USA be sure to pay quarterly taxes. I made an extra six figures last year and had a big surprise waiting for me at tax time. It wasn’t a fun experience and I won’t make the mistake of being unprepared again.

Expenses are any costs needed to run your business. This may vary in your case. This category includes web hosting, domain registration, web products, ssl certificates, registrations, office space, internet access, phones, etc. You can even create sub categories of expenses to track. I set this percentage low because I have low expenses. I work from my home and have very low expenses. It only takes around $167 per month to cover my business expenses when I’m not traveling.

Retained Earnings is like business savings. This is money you separate from paying expenses and paying yourself that you want to keep around. It’s very important to have a cash reserve for your company. In my case I still get taxed on all money the company earns not on just what I pay myself, but having this fund on the “business” side of the fence helps me keep it separate in my mind. This money doesn’t get spent on a new toys for my kids or a nice dinner with my wife. This category is for saving for business equipment like new computers, travel, entertaining clients and other non-fixed spending. Once you’ve fed this category for a while it can also cover fluctuations in revenue. You an still pay yourself even when you have a slow month or when you take a vacation.

This category is also for business opportunities that might arise. As an example there was a company selling the rights to their plugins and I was interested in buying them. The purchase price wouldn’t be included in my cash flow so I would have used money from retained earnings to buy the assets.

Owner Equity or salary is what you pay yourself. The term may mean something different to CPAs, but in this case I am referring to the money you bring home once or twice per month. I prefer to pay myself once per month to limit the time I spend doing money management.

What I left out

There are probably more categories that could go into the expenses list: marketing, sub contractors. employees, legal or professional fees, other one time fees. I don’t have any of these expenses except for my CPA so I left them out. If you need them add accordingly.

I also left out giving. With regards to charity my wife and I give to our church and other charities from our personal account not from our business. Some people chose to give to charity from their business and that’s fantastic.

Your turn!

I just started thinking on this recently so I’d love to hear your experience on budgeting for a solopreneur or bootstrapper. Let me know what has worked, what hasn’t worked and where you go from here.