When I guested on the Divine Downloads podcast, host Lisbeth Overton expressed some skepticism over my contention that every writer should set up a business bank account that is separate from their personal account. Surely freelance writing is a business you can launch with zero investment, right? And if you’re not investing money into your business, why get a business bank account?
I mention this (again) because I’m writing today on a related topic: Why you need a business budget and how to create one. Over the course of my 20-something years as a freelance writer, I’ve learned that the one thing that separates the successful writers from the ones who wash out is professional management of their business funds. And you can’t manage your business funds without a budget.
Do You Want to Just Survive? Or Do You Want to Thrive?
To Lisbeth’s point: Sure, you can launch your freelance writing business without investing a penny. You can start sending LOIs to prospective clients, flogging your services on LinkedIn, setting up an Upwork account.
You can do that. Many writers do.
But my question is: Do you want to merely survive as a freelance writer, or do you want to thrive and grow your personal wealth?
If your answer is the latter, then I urge you to take a professional approach to managing your business. That means managing your money, first and foremost.
There’s also a middle-of-the-road option: Start on a shoestring and reinvest every penny you make into your business until… Well, you need a budget to tell you ‘until when,’ because the answer is ‘until you’ve met your initial business objectives.’ And you can’t tell when you’ve reached that point without a system that accounts for all of your revenue and expenses.
What a Business Budget Can Do for You
If you’re like 60% of Americans, you don’t use a household budget to manage your money, so perhaps you find the idea of using a business budget onerous and unnecessary. Here are a few reasons why I argue you need one:
Avoid cheating the tax man because you thought you had money set aside for quarterly withholding when you actually didn’t
Enjoy the fruits of your labor by knowing how much revenue you need bring in to pay yourself a reasonable salary
Achieve peace-of-mind in knowing you have money set aside to cover an unexpected business disaster, like a dead work computer
Be able to take advantage of opportunities like attending a conference
Elevate your business profile with a professionally designed website, logo, business cards
Learn to set and achieve business objectives, including revenue growth
Avoid having to ‘float’ your business expenses on a high-interest credit card
You may agree with all of these things but still find the idea of a budget unappealing. Many people do. In case you fall into that camp, I want to share how I conceptualize the budget, which transforms it from a ‘chore’ I ‘have to do’ into a ‘tool’ that ‘helps me build wealth.’
What a Business Budget Is (or Should Be)
Perhaps in your nursing career you served in a management position where the upper echelon handed you a minuscule budget every year and said: Make do. This budget had zero flexibility to cover unexpected expenses, and, indeed, it’s even possible you got called on the carpet for over-spending a budget line or that you had to go hat-in-hand to the accounting team to justify why you had to bring in an agency nurse that day when three of your staff nurses called off at the same time. If you had these types of budget experiences, I wouldn’t blame you at all for resisting my call to budget for your business.
But that is not how budgeting works when you’re self-employed. As a business owner, you have total control over the budget and how your funds get allocated. YOU set the financial priorities. YOU decide when to flex a budget line in favor of another. In fact, your budget should be a living document that you revisit regularly and adjust as desired. I review my books weekly and my budget once a month, because, as with every business, my revenue fluctuates month-to-month, and I need to adjust my expenses accordingly (when I can).
Your business budget is a tool to set goals, including:
Revenue goals (target monthly, quarterly or annual gross revenue)
Expense goals (maximum of X% of gross revenue, for example)
Income streams (diversification)
Business goals (such as adding software products to improve your efficiency or adding disability insurance for your CEO [you!])
Of course, your budget also tracks information (business intelligence) that you can use to improve your operations. For instance, a budget can show you trends related to revenue peaks and valleys so you can refine your marketing to level things off. Or, your budget can show you if you have certain periodic expenses clustered into a single month or quarter. For example, maybe you belong to several professional associations and all their dues come due in December each year, which drives your overall expenses up. With a budget you can plan for that so your business can weather that storm.
How to Set Up a Simple Business Budget
At its core, a budget tracks income (revenue) and outgo (expenses). If you’re new to budgeting or don’t relish the idea of it, start with a simple budget that does only those two things. Even if all you do at first is track income and expenses, you’ll be far ahead of the freelance writer pack. Trust me, I’ve seen even highly seasoned freelancers confess they’re sweating their quarterly tax payment because they “thought” they had enough money set aside to cover that expense, but then they realized they “dipped into” the fund for some reason and now their finances are in a mess and everyone is stressed oooout! Don’t do that to yourself.
You have many choices for creating a simple business budget. Try:
*NB: Several years ago I was using Wave, and then I engaged a CPA who told me that software did not adhere to “generally recognized accounting practices” and advised me not to use it. I can’t say if this has changed in the years since, but I felt I could not include it in this list without adding the above caveat. I now use Quickbooks.
The online systems can pull transactions directly from your business checking account and business credit card (if you have one – and you should), which makes tracking both income and expenses easy. If you use a spreadsheet, then obviously you’ll have to enter everything manually.
I recommend you put all of your business expenses on a business credit card for easy tracking. It’s not hard to get an American Express card (referral link) if you have a business checking account, business address, etc. Plus, keeping all of your expenses on a single card gives you a concise record of deductible expenses at tax time instead of having to sort through a shoebox filled with receipts.
If you use an online tool for budgeting, the software will suggest a lot of categories (budget lines) to choose from. You can add the ones that make sense.
To inspire and motivate you, I’m sharing a snapshot of my actual Quickbooks budget report from July to August, 2019.
Let me point out a few things:
Notice this report includes four main columns per month: Actual, Budget, Over Budget, % of Budget.
Within the “Income” section, “Budget” represents the monthly income goal I had previously set. “Actual” represents how much money I actually deposited during the month. “Actual” does not include invoices I sent that didn’t get paid, only the honest-to-goodness Benjamins that fluttered into my business bank account. As you can see, collections were poor in July: I only made 57% of my income budget. Yikes!
But then look at August. Ah! Clients finally paid up! Welcome to the freelance lifestyle. You can see from this two-month spread alone why a business budget can benefit you. I don’t believe my revenue usually fluctuates this much because I tend to pursue monthly retainer clients. But, a month from now when I perform a year-end review of my books, I’ll be able to compare 2019 to 2018 to see if I’m correct about how my income fluctuates – so I can devise a strategy to address the situation, if necessary.
Other items of note:
Personally, I set the same income goal (“budget”) for every calendar month, but it can be useful to set different monthly targets, such as when you’re ramping up your business. Maybe you made $2,000 this month and want to aim for $3,500 next month – and $5,000 the month after that. Putting your income goal in black-and-white on a budget you review regularly can be very motivating!
Also, you’ll notice I actually have four income budget lines: Merchandise Income, Sales of Product Income, Subscription Income (thank you all!), and Writing Services. In past years, my only income line was “Writing Services.” This year, a key business goal of mine was to diversify my income streams so that a percentage of my revenue was client-independent. My budget enables me to track how well I’m doing and make necessary adjustments in marketing and other activities to achieve my goal.
Lastly, notice the category “payroll tax expense.” This is where I set aside money every month to pay Uncle Sam. I would never in a million years ‘borrow’ from this budget line, but if you feel you may not have the discipline to leave that money alone instead of dipping into it to pay yourself or cover a business expense, then I recommend you set up a separate business bank account just to hold your tax reserve fund. Having a second bank account makes it much harder to touch that money.
Budgeting When You’re First Starting Out
Maybe you’re sitting there thinking, “This is all well and good, but I certainly am not pulling down $9,000 a month in revenue, Beth, so what good does all of this information do me?” Well, of course, I wasn’t making $9,000 per month when I started out, either. I wasn’t making $5,000. Hell, I wasn’t making $500. In 2010, according to my tax return, my business’ gross revenue for the year was $2,983. But ya gotta start somewhere!
And, honestly, that’s precisely why you need a budget. When you’re making very little money because you’re establishing your business, you absolutely must use your budget to set those revenue goals and track your expenses with a finetooth comb. It’s very easy to get carried away, buying engraved letter openers with your logo on them and all kinds of silly stuff that fritters your money away before you know it. A budget will say you can’t afford that if you want to actually pay yourself something this month.
When you’re just getting started, use your budget to motivate yourself and develop a strategy for how you want to grow your business. Maybe your budget doesn’t include a line named “401k,” but that’s something you aspire to. What intermediate goals do you need to achieve in order to make that happen? Each time you receive a check from a client, how do you want to divvy it up? If you look at every invoice payment as personal spending money, for example, then your business will never grow. It may never even be self-supporting.
Let’s talk about this. Give me all your budget questions and concerns in the comments!