How much should you pay yourself? How much should you set aside for taxes? How much does your business actually need to make to be profitable?
A few years ago I read the book Profit First by Mike Michalowicz, and it outlines a great starting point for thinking about your business budget.
Since most solo-creatives are making between $0-$250k per year, we’ll just use that breakdown, but you can look at budgets for $250-500, $1M, $5M, and $10M per year as well in the book.
Here’s a starting point for a solo creative business:
5% – Profit (Hence the title Profit First
50% – Owner’s Compensation
15% – Taxes
30% – Operating Expenses
Take a look at your current budget? Where can you make adjustments to ensure that you have more profit, are setting aside money for taxes, and can pay yourself what you need to.
Now, if you’re creating digital products and have super low overhead, you can certainly drop that Operating Expenses budget down to 20% or even 10%, and shift more into Owner’s Compensation or Profit.
But having a very clear “job” for every single dollar that you bring into your business is an essential business practice. The alternative is having money coming into your business bank account (or worse, your personal account) and then spending if there’s money to spend.
Create a budget, set aside money for profit and taxes first, and then if you find yourself short then take the opportunity to figure out how to either cut expenses or make more money by generating more sales.