Okay, let me know if this sounds familiar: one month, you land a huge contract, and your revenue skyrockets. However, for the next two months, it’s like crickets. Your revenue dwindles, only to have another big month later. It’s a roller coaster, right? I’ve been there, and I understand how challenging it can be to budget in such an environment.

Welcome to Success Sundays with Harrison. I’m your host, Harrison Wilder. As a corporate strategist and entrepreneur with an executive MBA from George Washington University, I’ve managed two multi-million dollar companies and advised top-level executives across various industries. Therefore, this show is dedicated to providing practical insights that will help you succeed as a leader in today’s business world. If, you’re serious about developing your skills as an executive, you’re in the right place. Let’s dive into today’s episode.

The Challenge of Business Budgeting

Budgeting for a business is tricky. Unlike a family budget where you often have a fixed income and consistent monthly expenses, business revenue can be highly unpredictable, especially when you’re starting out. For example, one month you might land a huge client, and the next few months, there’s almost no income. Expenses can also vary significantly, from regular payroll to large one-time investments like conferences or personal development.

When my wife and I started our businesses, I was in real estate, and she was in graphic design. We faced the uncertainty of whether I’d get a sale or she’d land a big client. It was challenging to figure out how to manage our finances responsibly. This led me to discover the concept of percentage-based budgeting, which is different from traditional budgeting methods.

Introduction to Percentage-Based Budgeting

Percentage-based budgeting focuses on dividing your revenue into different categories of expenses so that you’re prepared for both good times and dry spells. This method was a game-changer for me, and I learned it from the book “Profit First” by Michael Michalowicz. I highly recommend his book for an in-depth understanding, but let me give you a brief overview.

The first step in percentage-based budgeting is to create a separate income account where all your revenue goes. This includes wire transfers, payments from credit card processors, PayPal, etc. Once the money is in this account, you can allocate it to different categories based on set percentages.

Allocating Your Revenue

1. Profit Account: Set aside a percentage for profit. This ensures you are taking profit from your business regularly. Michalowicz suggests starting with 1% and adjusting as needed. This money can be used for personal rewards or investments.
2. Owner Compensation Account: Allocate a percentage for your paycheck. Determine what percentage of your annual revenue is necessary to cover your living expenses. This might be a significant portion, especially in the early stages.
3. Tax Account: Set aside approximately 15% of your revenue for taxes. This helps you avoid being caught off guard by quarterly tax bills.
4. Operating Account: The remaining revenue goes into your operating account for all other business expenses. This is the account you will refer to when making financial decisions.

It’s important to build up a cushion in your payroll account to cover several months of expenses. Once you have six months’ worth of payroll saved, you can consider adjusting your allocations. This way, you’re prepared for any dry spells in your business.

To get started, open the necessary bank accounts: income, profit, owner compensation, tax, and operating accounts. Practice allocating your revenue to these accounts based on your chosen percentages weekly. This discipline will help you manage your finances more effectively and make informed decisions.

Conclusion and Success Challenge of the Week

I hope you found this episode on business budgeting using percentage-based allocation helpful. For this week’s success challenge, I encourage you to open the necessary bank accounts and start practicing this budgeting method. If you have any questions, drop them in the comments, and I’d love to help you out.

Thank you for joining us today on Success Sundays. Great businesses and leaders are built on effective communication. For more resources, visit speakingschool.com and grab my Elite Business Success Toolkit for free. See you next time!