How to Think About Business Expenditure

A client recently asked me the following question about business expenditure, and I’m reprinting it (expanded a little from my original email answer) here with her permission. This is an issue that we ALL have to deal with – “How much should I invest into different areas of my business?”

 

One thing I would like to know is what percentage of your money received from your business should go to what? For example, after you pay your recurring bills, what percentage should you set aside for marketing, for continuing education, and for taxes and for yourself to use as income for your household. I don’t know if there is a definite answer for this but some sort of guideline would be great so that I can create good money habits.

Here is what I replied:

I’ve heard a lot of numbers tossed around, like 20% of profit goes back into marketing, you should be spending around 10-20% on education, (I think those were the figures) but to be honest it’s a very individual decision.

Ideally you should have a budget forecast as part of your business plan. In an ideal world that would happen, and you’d stick to it and/or have more profit than was forecast and less expenses. But we live in the real world where things are neither so simple nor so black and white.

Some questions for you to consider:

How is your household budget? If you’re scraping to have enough to pay for groceries then that’s where your business money is going to go. Even though they’re in separate accounts, (you DO have a separate business account, don’t you?) if you’re struggling financially then that’s what you’re likely to spend it on. Your money habits in your personal life will be the same as your money habits in your business.

When that’s sorted out:

Assuming your personal household budget is in good shape and you’re not scraping from week to week:

How much do you have to put aside for GST/VAT or other taxes? Put it in a separate account until you have to pay it. Put away more than you think you’ll need and for heaven’s sake don’t touch it for anything else. The ATO/IRS/whatever your country’s tax office is called will chase you down and make your life h**l if you are short on your taxes.

Make sure you have enough aside to pay any ongoing costs such as stationary, coffee with clients, website hosting, phone or fax accounts and any other recurring type expenses. Put that away as well in a separate account if you can – you don’t want to have a hundred different accounts but a tax account, a bill-paying account and a general business account are fine to manage.

Then it’s the hard decisions – the how much do I put into marketing, education etc.

Depends what you need

Does your marketing plan include a lot of costly advertising? Marketing will be higher. Is your marketing plan mainly free stuff online? Much lower cost. You don’t HAVE to put a lot of $$$ into your marketing, there are ways to market for free or low cost. However, for some types of businesses, they need to be advertising etc.

Only you can say how much your marketing budget should be. Time wise, you should be putting as much time and effort into marketing as you possibly can.

Education is the biggie for most businesses, WAHM or not. You could spend thousands and thousands on education and not bring a single extra client in.

This comes back to your long term plan for your business – where do you want it to be in one year, three years, five years? What do you need to learn in order to get there?

What skills do you need that will increase your value to clients? Will those skills justify the cost? Are you in the catch-22 of needing a skill to make money, but can’t afford to pay for the course? (time to drink the cool-aid and sell the kids)

Also, you can’t forecast a lot of what you’ll need to learn because technology changes so fast. You may have to pay to keep current, you may be able to find it free. But there’s no point thinking that you’ll decide everything as you go along, you have to have somewhere and something to aim for so you have a measuring point to aim at to decide if a particular skill or course will help you or not.

Everyone’s answer is individual

It really comes down to a combination of your personal situation, your goals for yourself and your business and what you’re doing at the time. There’s no definitive answer that suits all businesses and business models.

I sent this to her with the comment “I hope this helps” and she replied back “No this didn’t help at all. You are suppose to say you have to do X Y and Z. Just kidding, this was very informative actually. The best information I’ve received so far on searching for answer to this kind of question.” LOL.