Once your business becomes profitable, what exactly should you do with the profit?
Pay yourself all of it?
Save it for slow months?
Reinvest it in the business?
Save it for taxes?
Your new profitable status turns overwhelming. You find yourself stuck in indecision when you really should be celebrating that you’re officially a legit business!
I’d like to introduce you to The 50-30-20 Method (for business!). You may have heard about the 50-30-20 rule in the world of personal finance where you budget your monthly income – 50% to needs, 30% to wants, and 20% to debt and savings. Using these same percentages, I adapted a quick and easy method for business owners to allocate their profit each month.
The 50-30-20 Method
Proper allocation of profit is important because it helps you to assign a purpose to the money the business makes in a way that supports your goals. It works especially well for new businesses working toward consistent sales and for consistently profitable businesses without a model for profit allocation. It is especially helpful for business owners whose sales vary by month (i.e. irregular income). The 50-30-20 Method helps maintain consistency in the way profit is allocated – 50% to paying yourself, 30% to saving for taxes, and 20% to for reinvesting in the business.
The benefits of The 50-30-20 Method
The 50-30-20 Method helps your business grow by setting a standard for profit allocation. You’ll feel more confident and prepared to tackle big money decisions in your business. It introduces a reward for you in the form of personal pay, and you’ll find yourself showing up differently in your business now that it is finally paying you. Saving for taxes each month eliminates the end-of-the-year surprise and cash burden that comes along with filing taxes. Reinvesting in the business prepares you for emergencies (hello, pandemic!), as well as other investments that can grow the business such as a coach or advertising. You’ll be more prepared financially for these reinvestments and less likely to tap into debt or credit to support your needs and grow your business.
The flexibility of The 50-30-20 Method
The 50-30-20 Method is goal-focused, which means it is adaptable to your needs. You can adjust the percentages and allocation buckets to accommodate your priority.
For example, should you decide that reinvesting in your business is a priority over paying yourself – you can switch the categories and allocate 50% to reinvesting in the business with 20% to paying yourself OR you can adjust the percentages to whatever works best for you. You may find that saving 30% for taxes is more than you need. If so, adjust that percentage to make better use of your cash during the year to pay yourself more or reinvest in the business. As long as the percentages for your allocations total to 100%, you’re all set.
