How to Create a Financial Plan for Your Side Hustle or Small Business Startup
If you just started your side hustle, you may feel like you don’t need a financial plan. However, as your business grows and new costs and considerations pop up, it will become more complicated. If you want to decrease stress and be prepared, a financial plan is crucial.
3 reasons to have a financial plan for your business
- To make sure you can actually make money and turn a profit.
- To ensure spending decisions are made based on needs and as part of a plan to keep costs under control.
- To make sure you stay on top of our taxes – not just income taxes. More than $400 of self-employment income (profit) means paying self-employment taxes, which are those social security and medicare taxes that get withheld from your W-2 pay and that employers also pay for employees. As a self-employed person, you are responsible for the full amount of social security and medicare taxes yourself.
Creating the Financial Plan
The biggest mistake I see with many solo side hustles or start ups is the “it takes spending money to make money” mentality.
In some cases, you do need to spend a lot of money to get your dream going. You may even need to borrow money, but most of the solo businesses I see can keep expenses at a minimum in order to make a profit faster. To do this, you need to keep it simple. Keep spending as low as possible while still being able to provide the kind of customer service you want to provide.
This process is for those starting small and wanting to keep costs down until you have some growth. We’ll cover the operational considerations from the budget/financial projections separately.
- Business Account: Determine where you’ll keep your business money. Use checking and savings accounts separate from your personal accounts. If you don’t have what is required to open a business account. Often an Employer Identification Number (EIN) is required. Once your business account is ready, use it for business purposes only. Keep personal and business income and spending separate.
- Credit Cards: If you are going to use a credit card to make business purchases or pay business bills, plan on having a credit card that is only used for business purposes. Getting your first business credit cards does typically require a check of your personal credit, but business credit cards are not typically reported on your credit report. Many business credit card providers will allow you to get a business credit card without an EIN. Again keep business spending separate from personal spending.
- Payment Process: Determine how you are going to accept payments and set up accounts and/or get software as needed. Make sure to factor the software pricing and any fees into your financial projections and budget.
- Record Keeping: Identify and set up a simple record keeping system. You should keep receipts and invoices. The IRS has rejected expenses claimed with the only proof being credit card statements.
- Emergency Fund: When possible, set up an emergency fund or rainy day fund for your business – just like you should with your personal finances.
- Budgeting Bills: Set aside funds for infrequent costs or bills. For example, an expensive software program that you pay for annually.
Financial Projections & Budget
- Determine how you will prepare your financial plan. Pen and paper can work starting out. Many financial plans I see from solo entrepreneurs are mostly, or even entirely, in spreadsheets like Microsoft Excel. In the spirit of keeping costs down, there are free spreadsheet software options available like Google Sheets and WPS Office Sheets.
- If or when you are ready, you can opt for software specifically designed for small business financial planning. One example is Finmark. The fee is based on your revenue. At $60,000 a year, the fee is about $100 a month.
- The more sales you have, the more likely you’ll need accounting software to help handle the tracking and calculations.
- Identify and list your revenue and client goals for at least the first year, preferably the first two years.
- Identify the minimum costs to operate your business. It could be that there are costs some may consider optional but you require in order to serve your customers the way you want to serve them. These costs will be your fixed costs
- Identify your “per client” or “per order” costs, beyond your fixed costs. These are your variable costs.
- Determine pricing for your product or service. Methods for doing this vary by the type of business. Two big factors are current market rates and your desired profit margin. Find out what similar businesses charge and see if that is enough to cover your projected expenses and make a profit.
- Identify your break even point, which is the amount of sales needed to cover your fixed costs plus your variable costs up to that point. Reaching the break even point is a great milestone.
- Track, review, and adjust as needed. It may seem odd, but many new business owners focus more on the doing than on the money. Closely tracking your cash flow and costs can mean the difference between business success and failure.
The person with the most interest in ensuring your business is a success is you, so make the effort to create a financial plan that works for you. If you find yourself needing help, the Small Business Administration offers free webinars, counseling, and membership to help you get started and to help you get going.
Jerry Zeigler is a Navy veteran who serves service members with financial counseling and education. As an Accredited Financial Counselor®, he is a member of the Better Financial Counseling Network and is the owner of JZ Financial Management. As a tax professional and Enrolled Agent, he has a passion for helping taxpayers navigate taxes.