There is a delicate balance for business owners in Diamond Bar in how they manage the different proportions of cashflow that they allocate for personal income, and re-investing into the business.
Identifying that proportion is a simple matter of budgeting, and managing your own expectations of how much you will pull out on a monthly basis. A rule of thumb I like to tell business owners is that they make a simple average of their profit over the past 12 months, and use that as a starting point. Then, you adjust during the bad months, and during the good months, you use good discipline to keep yourself from feeling too financially frisky.
How you then decide about your particular personal income percentage really does depend on your particular business goals, and what stage the business is in.
Despite the busyness of our season, if this balance between personal and business re-investment is something you feel that you want to discuss, give us a call: (909) 861-5642 (or shoot me an email, by clicking the button in the upper right of our site here).
But when it comes to your personal financial goals as a business owner, I find that there is another simple method for accumulating wealth outside of your business activities and that is the “walk away” number.
It’s the dollar amount that sets me free from financial stress — and to be able to give when possible. Here’s a way to organize moving towards it…
How To Set Business Financial Goals For Diamond Bar Companies
“Courage is contagious. When a brave man takes a stand, the spines of others are often stiffened.” -Billy Graham
You may or may not have set up a “walk away” number for your personal income from your business, but if you haven’t, I suggest you do so.
It’s the number that, once you reach it, you are able to walk away from the business in whatever form you feel makes the most sense for you at the time.
Once you establish your “walk away” number, you record it and keep it in front of you. Then, every day, every week or, least desirable, every month, you examine the bank deposits from all your businesses. And you take out a certain percentage for yourself.
When I first started my business, I was barely making a profit. My percentage had to be low. But I was quickly able to grow it.
After I take out my percentage, I divide this personal money into three pots: giving, spending and wealth.
My giving account is for charitable donations, and I make sure I’m reinvesting money into the community. I contribute with the expectation that I’m going to receive back what I invest, plus profit. I invest in charitable giving in the same way a farmer invests by planting seed corn in a field. That farmer anticipates a harvest that far exceeds what he planted. Same with giving. For you this could be your church or any combination of charities and direct giving.
Next is spending. This is “mad money.” Cash I don’t mind spending on toys, nights out or anything I don’t need but really want. This way I feel directly rewarded for the efforts it took to make those deposits into the bank.
And finally, wealth. These are contributions toward my “walk away” number. Each time I make a deposit, I record it, compare it to my total “enough is enough” number and my monthly goal for “enough is enough” contributions. This focus on the bottom line helps me keep my goals in perspective.
The percentage you take out of your deposits and the way you distribute those funds among the three pots is a personal choice. The percentage of the specific distributions could vary, person to person — but it is the daily, weekly and monthly emphasis on the goals that matters.
Also keep in mind that hitting your “walk away” number isn’t just about revenue. It’s also about keeping your expenses low. I often find that a smaller size business allows me to be more effective and efficient.
Most important, this system marches you closer to the financial goal that really matters: financial freedom — and that’s a good freedom to have.
And though we are very busy this time of year, we’re right here for you, if you need us: (909) 861-5642
Feel very free forward this article to a Diamond Bar business associate or client you know who could benefit from our assistance — or simply send them our way? While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for Diamond Bar families and business owners. And we always make room for referrals from trusted sources like you.
Bharti I. Sudan
Bharti Sudan CPA Inc.