Managing your finances effectively in a home based business is one of the most important – if not the most important – aspects of the profession. When you have taken control of your finances you will quickly realize exactly what is possible. You will also have a good overview of the kind of spending you are doing in your business and be able to reduce your expenses if necessary so you can invest in other strategies that will allow you to organically grow your business.
Taking charge of your budget
The first and most important step to any home based business’ finances are to use some sort of budgeting solution to take command. Any comprehensive budgeting software will do, or if you are good with Excel and formulas, then you can simply make a spreadsheet to take care of it.
The important thing is to be able to see clearly how much money you are spending on business-related expenses and to objectively see how much money those expenses are bringing in every month for your business.
The 80/20 principle
The Pareto principle states that 80% of the profit should come from 20% of the effort. Put in blunt budgetary terms, this means that if the expenses to bring in your income are 20% of the total value or less, then you are working efficiently. This is not to say that you should never consider putting more energy, effort and expenses into something, but be aware that it all has to balance out in the end. So, you might lose 50% of your income when you pay taxes to the government, but at the same time, you can drastically reduce your business-related expenses to 5% or less for the income (bank transfer fees, etc.) to balance it all out and win back in places where it’s possible.
These kind of detailed analyses are only possible when you have a comprehensive budget set up which will allow you to see quickly at an overview of where your current finances are and what you can do to improve them.
Pay it forward
Just as when you are creating a personal budget, you should be aiming to being able to have enough of a buffer zone in your bank account to pay for at least 3 months of expenses, so that any income you are making is pure profit. This kind of safety buffer allows you to worry less about when clients delay with payments and will grant you the peace of mind to be able to create instead of worrying about managing finances.