In the United States, tax season is upon us.

Raise your hand if you feel like you just figured out last year’s taxes. Sigh.

I haven’t gotten a tax return in years. Even when I make 1040-ES quarterly payments, I end up owing more. Carving up a savings account to satisfy the IRS is always a tad disheartening, which is why I appreciate my accountant’s positive attitude: “Hey, that means you made more money last year than the year before!”

Regardless of how your business fared or how you feel about Uncle Sam’s hand in your pocket, turn tax season into an opportunity. Recalibrate your financial habits and practices for the new fiscal year.

Now for a dirty word: budgeting. Look around the web, and you probably won’t find a simple, common-sense budgeting plan for small business owners. Yet, one of the biggest hurdles for freelancers, creatives, and consultants is budgeting. Your employees and contractors may know what your business will pay them next month, but you often don’t.

Even if you pay yourself a monthly “salary,” you probably still must adjust that number from month to month. Crap happens.

My friend purchased a wildlife removal company in Nashville when an employee—most likely still drunk from the night before— totaled one of the company trucks. The guy with the bad judgment is long gone, but his pink slip didn’t pay the insurance deductible. When operating expenses balloon, the owner’s take deflates.

And if your business involves client work, then you might be accustomed to billing $4350 one month and $9725 the next. You might get totally slammed with new projects in April and watch tumbleweeds blow through your deserted queue in May.

budgeting plan for small business owners

Photo Credit: Vincent van Zalinge via Unsplash

Rabbits versus Dogs

It’s hard for people with variable income to achieve stability. But whether you’re a freelance designer, co-founder of a high-growth startup, or a business consultant, you must account for month-to-month fluctuations. And to do that, you’d be wise to ignore most budgeting advice.

Why? Your variable dollars are W-9 rabbits, not W-2 dogs.

Self-employed W-9 rabbit dollars can multiply rapidly. They sure are cute, but they’re skittish too. They can disappear in a flash and be very difficult to recapture.

By contrast, dog dollars don’t multiply as quickly. Unless you do something heinous (or the family downsizes or dissolves), they keep showing up. They’re faithful, tame, and relatively predictable.

The simple, step-by-step plan below is for domesticating W-9 rabbit dollars. The goal is stability in the midst of unpredictability.

Live on last month’s earnings.

The best way to not overspend during drier months is to live off the money you made the month before.

In order to do that, you need a business checking account, a personal checking account, and a business savings or “storage tank”—that is, a special savings account, preferably with a different bank. This storage tank is similar to the “emergency fund” or “rainy day fund” you might already use in conjunction with your personal finances. This business savings account will eventually contain 90 days worth of operating expenses, including your monthly salary.

Don’t have a monthly salary? Divide last year’s pre-tax take-home pay by 12. That monthly average is good starting point for a salary and personal budgeting.

If you’re newer to the freelancing or self-employment realm, you may not be accustomed to budgeting and spending less than you earn. You might be tempted to dip into extra net profits in your business account. Don’t. Learn from my past mistakes. I have been guilty of giving myself a raise instead of putting the surplus back into the business. I could have made it really, really healthy by investing in people, processes, and systems and setting the stage for further growth.

(Quick detour: Now I’m all for celebrating success. In fact, I’d recommend including a celebration allowance into your storage tank. Have a banner month? Treat yourself to a nice dinner. Buy a shirt. Live the dolce vita for a day or two. Then get back to business.)

A Job for Every Dollar

Don’t use a windfall to buy anything shiny. Use it to fertilize future growth. Create a job for every dollar–both real dollars and imaginary ones. You’re more likely to make more money if you have a plan both for making it and for spending it. And your plan needs to be bigger than what you currently earn. That’s the whole point of business, right? To grow? Not just to survive but to thrive? (Read this post to figure out your Thrival Number.)

Now for the rest of the steps:

  1. Using last year’s monthly average, create a tentative salary for this year. Let’s say that number is $6000 per month.
  2. Add up all of your monthly operating expenses, including your salary, estimated taxes, tech, services, office space, and so forth. Let’s say you’re still solo, so you only have $1000 worth of operating expenses for a total of $7000 a month.
  3. Divide that monthly total by 6: $7,000/6 = $1166.
  4. Add that additional $1166 to your monthly baseline of $7000: $7000 + $1166 = $8166.
  5. Scrounge up that extra $1166 per month however you can. Find a new client. Book consulting calls through Clarity.fm. Sell stuff on eBay or Craigslist. Mow yards in your neighborhood. Do whatever you’ve got to do, then move the money to your business savings account. (Note: I like SmartyPig because it is SEPARATE from my regular checking account. The money is less accessible, so I’m rarely tempted to spend it. In fact, I often forget about it altogether.)

In order to fill up your storage tank with one month’s worth of operating expenses over the next 6 months, your monthly sales target must exceed $8166.

Obviously, this ideal scenario exists in a vacuum where no boneheaded employee wrecks a company truck while you’re busy creating stability. In a less than ideal world, you may need longer than six months to set aside $7000, or it may take no time at all.

But you still get the point: once you’ve got the storage tank, you’re effectively not living month to month anymore.

How to Use Your Storage Tank

At the end of one month, you drain your storage tank—aka, your business savings account—into your business account. Then, once you move your salary from your business account to your personal account, you’ll have your personal and business budgets ready to go.

As new accounts receivable splash in your business account, you can move those new funds over to your business savings account or make deposits directly into it. If you come up short with new billing, then you can take one look at your business savings account and know what you have to live on the next month to not accumulate debt.

That’s the beauty of this little system: you base your budget on money you’ve already got in the bank, not on money you hope to make. You’ve can enjoy the upside of self-employment while minimizing the sting.

Over time, you may be able to enlarge your storage tank and have 2, 3, or 6 months of operating expenses already laid by.

At that point, why not ratchet up your own salary? Or include a contribution to a ROTH IRA, SEP IRA, or both in your monthly expenses?

Things get really interesting when you have breathing room. Desperation hightails it out of your life. Your imagination blossoms.

Now, build your Opportunity Fund.

Don’t be surprised when your efforts to exceed $8166 in monthly sales continue to pay off long after Month #6. You might start billing $10,000, $12,000, $15,000 a month. You might start selling than your own time: for example, product sales, sub-contractors’ time, or residual income from SaaS subscriptions or ad and in-app purchase revenues from mobile apps.

Give those dollars a job too.

After I started licensing my mobile app source codes in 2013, my business at the time, Bright Newt, began generating a serious surplus. Because I sat on the money, I later had the opportunity to invest in Closeup.fm and become a co-founder.

You might start to think about traveling more. You might want to hire your own replacement and take on more of an advisory role in your own company. You might start dreaming about an extraordinary life not predicated on fluctuations and shortfalls.

Cut out the variable, and you’ll be loving life.

***One final thought: I mentioned my accountant earlier. Hiring her was one of the best business decisions I’ve ever made. If you don’t have a professional keeping your books, I’d recommend that you hire someone immediately. For $90-$250 a month someone with more education, knowledge, and training free you up to focus on your strengths and can keep you honest about cash flow and expenses at the same time. If you don’t already know a meticulous bookkeeper, contact Two Roads.

Do you want to build a profitable business you love?

Duh. Pony up that email address, and you can learn from my failures. You can laugh at my mistakes. You can envy my success at croquet, slow running, and modest bank accounts. Let’s make good money and leave the world better than we found it.

No-nonsense business advice for content writers and freelancers. Served warm with a side of dad jokes.

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