Balancing saving and spending
When it comes to financial planning and deciding where to spend and save for your business, creating a budget is the imperative first step. Taking a look at your business finances and calculating expenses and receivables will help you get a snapshot of your current situation so you can make practical and realistic decisions about short and long-term needs and wants.
How to balance your spending and savings can be a challenge when contemplating business growth, especially if you will be initiating debt through a business loan or line of credit. While using your savings for large purchases can avoid you paying interest in the long term, having working capital is invaluable. A business loan or line can allow you to retain your cash while taking advantage of lower interest rates while paying off long-term debt, such as commercial real estate or an equipment purchase.
If you’re a small business owner, keep your business assets separate from your personal assets by opening a business account to assist with financial planning, savings, and recording.
One approach is to use the popular personal 50/30/20 budget rule for your business by allocating 50% of your after-tax income to needs, 30% to wants, and 20% to future financial goals or savings.
Needs include business costs such as rent, operating expenses, and inventory, whereas wants can be new equipment, updated electronics, and expansion projects.
The remaining 20% can be used for long-term goals, such as a down payment for commercial real estate, collateral for a business loan, or other costly growth endeavors like remodeling. Monitor your spending easily and electronically using online banking.
Other approaches to budgeting can be the 80/20 rule where you spend 80% of your net income and save the other 20%, or the 70/20/10 rule where 70% goes towards expenses, 20% to debts and 10% to savings. Having a goal (or several) and an expected date for completion will ensure you reach your savings targets in increments, which will motivate you to continue to save.
For more information about creating a budget for your business, take a look at our How to Start a Budget and Save for Your Goals blog.
If your business can improve dramatically by newer technology or upgraded equipment, the cost will be worth the investment that will increase your bottom line over time.
Covering/anticipating future expenses with insurance is worth the cost of premiums versus having to deal with a completely new purchase in the future. Predicting one-time expenditures, or expenses that happen less frequently, are useful to calculate into your budget as well, so you don’t deduct these from your savings goals for other items. If you have an emergency fund, these expenses should be included here.
Getting professional help with your money, such as hiring an accountant or wealth manager, are also reasonable expenses because the potential to maximize tax deductions and savings will likely be greater than the cost of a CPA.
Spending and saving may also depend on the time of year for your business. One season may be a busier time and saving might be easy. During slower times of the year, spend on your business to carry out remodeling projects, upgrade technology or equipment or make hiring changes to have as little impact on your business as possible.
Review your last years of financial statements to see which times during the year see more income than others to make a realistic annual budget. It’s ok to make budget adjustments as your situation may change throughout the year, seasonally or otherwise, and you can use your high season to make up for slower times in the year.
Whichever method of budgeting you choose, determining how much, where, and when to allocate funds by first creating a budget will provide insight about your current financial situation and where you can make adjustments to stay on track and realize your future financial goals.
Contact one of our business bankers today about financing and cash management solutions that could help your business save today and invest in the future.