When I started working for myself, I kept all the money in my business account and when I could, I took a little bit out of it. When I felt like there wasn’t enough in there, I would just leave it and not pay myself for a while. It was this mysterious relationship between me and my business money until I realized I have to pay myself every month and I want to know exactly how much my business is going to pay me. I want you to do the same, so I’m going to share with you a system inspired by a book by Mike Michalowicz called “Profit first”. It’s a system I use myself and I highly recommend you read this book (I’m not paid to recommend it to you, I just really loved it!).
First of all, to profit from your handmade business, you need to set your prices strategically and with decent profit margins. If you don’t do it yet, here’s a free handmade pricing calculator to help you figure that out.
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Once you have your pricing in place, you will need to separate your business and personal accounts. In fact, I am going to recommend you several business accounts. I know it sounds craaaazy but stay with me. The first account will be your main account that has only one purpose: getting paid. This is the account that’s linked to your Paypal, Stripe or whichever card processor you’re using. It’s where all of your income, all of the money you make from sales is being deposited in.
Next, you’re going to decide on percentages you want to allocate to 4 “buckets”: profit, your salary, tax, and operating expenses. Each of those buckets will be a different account. The idea is to “profit first”, so to transfer a small percentage of the total income into the “profit” account. It doesn’t need to be big, but it’s important to still do it, even if it’s $2 that month. After you transfer that money every month, don’t touch it during the year. The only moment you’re going to touch it is at the end of the year when you will get to decide if you want to take it for yourself or reinvest it in your business. Up until this point, you’re just accumulating money in this bank account and not touching it so you’re already making a profit and you haven’t even paid your expenses yet, which is fantastic.
The second account or the second bucket that you will distribute money in after you put money aside for profit is paying yourself. The idea is that you take a percentage of your income and pay yourself straight away from it. The more money you make, the more money you take, the less money you make with your business, the less money you take.
Now that you have a profit on the side already waiting for you and you’ve paid yourself, it’s time for bucket number 3: taxes. You need to work the percentage out based on where you live and your situation, but that’s where you want to be putting money aside for taxes.
Finally, the last bucket is your operating expenses. That becomes a budget for your business expenses. So, for example, let’s say you made $100. Out of that $100, you decide on percentages you want to allocate to each bucket. Let’s say it’s like this:
The beauty of this system is that not only you’ve already made a profit and you’ve already paid yourself, you’re also going to create a business that’s very lean and that’s never really going to be bankrupt because you know that what is in this expense account is the maximum money you get to spend to run your business. That forces you to not get shiny object syndrome and starting to hire for this service and this service and try to subscribe to this product and this tool if you can’t afford it.
It’s really a neat little system and I probably didn’t do it justice as well as those 200 pages so I would really, really recommend that you read this. It’s not just if you’re already making a gazillion dollars, you can get started even if you only put $1 aside each month to pay yourself. The idea is to really get used to paying yourself and writing yourself a check. I don’t want you to wake up three years after you started your business and go: “I’m tired. I’m not making enough money” because you didn’t build that system to pay yourself in the first place.
I hope this was useful. Let me know if you’re going to get the book or if you read it already and if you liked the concept of it.
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