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From a practice management standpoint, this might be the single most important habit to setup: Develop on a budget. Income will be variable, and to keep money from sinking your business (or credit), you need a plan. Regardless if you practice a budget in your personal life (and I think you need one at home, too), budgeting creates responsibility and self-accountability all while easing financial anxieties. I’ve developed a simple spreadsheet that helps me to stay within my limits each and every month (you can check it out, and other accounting spreadsheets here).
The below points are not a comprehensive approach to budgeting, but it will give you a good start towards financial health.
Set a Financial Baseline
How much money does your business need to make each month? What are your fixed expenses (rent, taxes, utilities, etc)? If you’re just beginning your practice, or if you’re within the the first 2-3 years, the salary you need is likely not all coming from your practice. Assuming it’s your full time job, it takes roughly 3-5 years to get a practice up and running with a solid referral base (some do it quicker, and for some it takes longer).
You probably need to pay yourself less than what you think you need so that you can have some margin. This leads me to my next point, which is the most important part of a budget for variable incomes.
Pay from Last Month’s Earnings
From the very beginning, you need to pay yourself from what you earned last month, not from what you will earn this current month. This is the best advice I can give you about being self employed. When you pay from what you’ve earned, you are not in debt. When you pay yourself 2, 3, or 4 times a month based on your personal needs and/or the availability of money, your personal life/budget is behaving like it is in debt to your business. This is a slippery slope that you need to avoid.
To begin this process of paying yourself from last month’s earnings, you may have to make some sacrifices for a month or two in order to allow your business earnings to create a sustainable buffer.
Let’s say that you want to make $2000 a month from your practice. Let’s also assume that your operating expenses are $1250 per month (rent, phone, utilities, etc). If you’re charging $100 per session, that means you need to have around 50 sessions per month to cover your taxes, expenses, savings, and salary. Here’s how that breaks down:
Taxes – $1250 (~25%)
Expenses – $1250
Savings – $500 (Paid Time Off, Retirement, etc)
Salary Need- $2000
If you have less than 50 sessions, take care of the expenses in the order they appear above. Pay your salary last. The idea here is that by paying yourself last, you will not be taking more money out of the business than what you’ve earned. I can’t stress this practice strong enough.
If you have more than 50 sessions, set aside any extra earnings in a separate checking account (read this article about Banking 101), and pay yourself what you budgeted. Do this each and every month until you have created at least one-month’s budgetary needs in your separate savings account. At that point, you can begin increasing your salary (but make sure to keep increasing your 1-month savings to reflect your new budget).
Set Aside Taxes First
The first action you need to take is to make sure you’re setting aside self-employment taxes each and every month. I’ve written several times about this before, and cannot emphasize it stronger. Debt will kill your business. If you do not set aside what is required from the government, you will feel like you are behind and in debt. This will not bode well for an already challenging and stressful profession.
Save for Retirement
Now that you’re self-employed, no one is going to cover your retirement savings. I set my retirement savings just like a business would for it’s employees. My business will match up to 3% of my salary for retirement savings. I have this setup as an auto-draft with my financial provider, and would encourage you to do the same.
Save for Paid Time Off
Employees get a compensation package from their company that usually includes some structure for paid time off, or vacation/sick days. As a fee-for-service practician, if you don’t work you don’t get paid. That problem is easily solved with a Paid Time Off (PTO) plan. Either get an envelope or setup a separate bank account and attempt to save enough money to pay for one day of PTO per month. Using the same assumptions above, if you’re business needs $5,000 a month to operate, one day’s pay represents roughly $250 (based on 20 business days a month). Saving $250/month means you will have saved for a full-week’s vacation/PTO in 5 months. Trust me on this one: Having a funded PTO account means I can take a vacation and be fully present. I don’t have to worry about the money I’m losing by not working because I’ve already earned that money for my vacation.
Regardless if you follow the above advice or not, your business needs a budget. Find a system that works for you and your business needs. Budgets take three to six months to implement and get working well for the individuals use, so give yourself some time and grace to get this setup. If you need help developing this for your practice, set up a coaching session with one of us here to guide you.