How Much Should Startups Be Saving Each Month
Launching your startup is an exciting time. You are rubbing shoulders with exciting opportunities, learning more about your clients, and discovering new ways to scale your business. While there is a lot of excitement during those early days, there is also a lot of stress and questions.
- Am I charging enough?
- What if someone leaves a bad review?
- Are my margins too small?
There is a lot of networking and mentorship that goes into making sure your business is not falling behind. Which is why we decided to support those startups who often struggle with this question – how much should I be saving?
How Much Should I be Saving?
It is common for owners to make business financial decisions based on personal finance principles. We quickly discover there are too many additional factors to treat our business finances like our personal finances. So where to begin?
Understanding how much you should be saving starts with having a deep understanding of your finances, which stems from having clean and accurate financial statements. If you find you are also confused with how much money you are making, spending, owe, and have within your business, we recommend starting with talking to a bookkeeper.
A bookkeeper will be able to help set you up so you can understand the flow of your cash, where you are spending the most money, and determine how much profit to set aside each month. All important details in understanding how much you should be saving.
Creating A Plan
Once your accounting is in a place that allows you to feel confident in your financial statements, it is time to create a plan. We recommend following our Truly Profit Plan.
The Truly Profit Plan guides you on how to categorize all of the income you earn. For every dollar earned, it should be broken up into these 4 categories with the associated percentages.
- Owner’s Pay – 40%
- Taxes – 10%
- Profit – 10%
- Operating Expenses – 40%
Not only will following this plan ensure you are getting paid each month, but you will also intentionally make space for profit in your business. It is then what you do with that profit that will determine how you build up your savings.
Looking at the percentages above, you will find that your profit is going to be determined by how much income you make. Profit is typically determined by how much you spend, but by specifically fractioning out your profit from the start, you are setting yourself up for consistent gains.
We recommend setting aside your profit every month and then every quarter, dividing your profit into thirds. One third should go to a retirement account, one third should be spent for you as the business owner to have fun, then the third is (you guessed it!) what you will put into a savings account.
Your Savings Account
Whether you decide to follow the Truly Profit Plan or not, it is highly recommended you establish a business savings account. That account should always contain 3 months of expenses, until you are in an unfortunate situation and need to dip into those savings.
If you do not have an established business savings account, we recommend starting one and begin implementing the Truly Profit Plan. Every quarter, take a third of your profit and contribute it to your savings account.
Once you have 3 months of expenses in that account, you can begin to divide your profit in half. One half goes to your retirement account and the other half can go towards fun for you, the hard working business owner.
Let’s walk through an example to help you visualize how we recommend implementing the Truly Profit Plan. Assume in quarter 1 of 2021, your business made $10,000. It should be divided into the following four categories as:
- Owners Pay – $4,000
- Taxes – $1,000
- Profit – $1,000
- Operating Expenses – $4,000
From there we will take the $1,000 sent to profit and divide it into thirds.
- Emergency Savings – $333.33
- Retirement – $333.33
- Owner Fun – $333.33
Since you have an operating expenses budget of $4,000 per quarter, that will equate to the savings account you should have established (3 months of operating expenses).
If you contribute $333.33 per quarter, assuming you make the same $10,000 every quarter, it will take you 1 year to complete your business savings account.
Once you reach $4,000, we then recommend dividing your profit into halves. One half for retirement and the other for owner’s fun.
Getting your finances together is one of the most important tasks as a business owner. If you are able to gain control of your finances, establish a comfortable savings account, and have some cash to enjoy yourself, you will confidently find you are on your way to a business you can be proud of.