Why did you go into business for yourself? Having coached hundreds of small business owners over the past fourteen years, it’s my experience that the answer most give in some shape or form is freedom, especially financial freedom.
Morgan Housel, the author of The Psychology of Money, explains that financial freedom is about independence. It’s about owning your future.
He says, “Doing what you want, when you want with whom you want is the most incredible thing money offers; that too often goes over looked. Viewing every additional dollar of wealth as...there’s a little bit more independence...is a fun way to look at it.”
Many small business owners are too focused on making money and not focused enough on keeping it. And, wealth is about what you keep, not what you make.
It’s not what you make that counts; it’s what you keep.
There are two components of saving more money:
- A spending plan at home
- A cash flow management system for your business.
The Spending Plan
A spending plan is about directing your money. It’s about telling your money where to go instead of wondering where it went. A good spending plan will combine both constraints and freedom.
The constraint is about limiting the amount of money available to spend. The freedom comes when you realize that you can spend that bucket of money any way you choose. The best way to do that is to set up the constraint first.
Determine how much money you want to save, invest and give, and take that off the top. The remaining amount is left over to spend on housing, food, and anything else your heart desires -- as long as you don’t spend more than what’s left.
A good target to shoot for might be to save 10% of all you make, invest 10% and give 10% and then live on the 70% that is left over. There are no hard and fast rules. You get to decide the percentages. The key is to implement a spending plan and adjust over time. Start small.
The Cash Flow Management System
If a spending plan directs your household finances, an effective cash flow management system directs your business’s revenue. Your framework should be simple to implement and easy to follow.
Here is a plan I suggest to many of my clients: allocate a percentage of every dollar of revenue to the following buckets: profit, compensation, taxes, operating expenses. The ratios will change depending on the size of your business.
I suggest having a good accountant and business coach to help you create your plan. The book Profit First by Mike Michalowicz offers some guidance that may be useful in the short run.
As with a household spending plan, the key to implementing a cash flow management system is to adopt the framework, start small, and make adjustments over time.
Your Path to Small Business Financial Freedom
You started your business for a reason. Likely one reason was to build wealth and achieve financial independence.
If you want your business to be a tool for building wealth and achieving financial freedom, you need to implement a simple and effective cash flow management system for your business and a spending plan at home.
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