August 20, 2018
I’m going to let you in on a super embarrassing part of my entrepreneur journey. Something that makes my stomach turn and my face flush (which, btw, is not hard to do, I swear my blushing nerves are on the fritz because I blush entirely too easily 😅) Anyway, this part of my story is something I have to live with, but contributes heavily to my mission to help creative entrepreneurs like yourself avoid the mistakes I made early on.
I worked a full-time day job right out of college for 3 years, where I started with an annual salary of $40K. I was already a few years into my business at this point, so I was also working my side-hustle at the time. This was the most money I’d ever had flowing through my hands, but now? Financially, I have nothing to show for that time. I was in a constant cycle of money-stress, wondering how I was going to cover costs, blaming my lack of natural number prowess and crying over seemingly impossible dreams of going full time in my business. HOW do people do this, I was constantly wondering.
I didn’t know my numbers at any given time. I didn’t really save for taxes. I did my taxes wrong. I didn’t save for upcoming expenses. I didn’t plan well and I spent way. too. much. I obviously NEEDED that beautiful $100 floral camera strap, right? 😬
BUT have no fear, my friend! Getting control of your business finances is DOABLE. Even if you’re not a numbers person. No part of me comes by this naturally. Like, I seriously can’t remember my mini-golf stroke count a few seconds after finishing the hole. 🤷🏼♀️ Even if spreadsheets give you the heebie jeebies, you can do this. I make mine pretty to ease the pain. 😅 I consistently help my clients get this handled and the incredible FREEDOM they feel when they do is worth more than all the lattes in the world. And that’s saying something coming from me! 😉
So let’s dig into it, mmk?
First, we need to do a little vocab recap. There are business and financial terms that you will hear more and more as you work through your numbers and these are the basics you need to know in simple terms!
Gross Income: The total amount of money you bring in before any money goes out for taxes or expenses.
Net Income: This is your business income after expenses. Net Income = Gross Income – Expenses.
Expenses: Money you spend.
Outstanding Expenses: Expenses you have coming up or due, but have not yet paid.
Overhead or Operating Expenses: The costs you have in business whether you book a client or not. Also commonly referred to as Cost of Doing Business. An example would be your website cost.
Salary: The money you pay yourself personally from your business.
Job-Specific Expenses: These are the costs you only have when you book a client or make a sale. For a wedding photographer, an example of a job-specific expense would be a booking gift. They won’t have to purchase a booking gift if they don’t book that client. An example for a product shop owner who sells custom canvases would be the cost of the canvas itself. They wouldn’t have to purchase that canvas if they didn’t have a client ordering it.
Income Tax: Federal (national) and State fees for making income.
Sales Tax: A State fee for the product (and some services) you sell. These are different per state and some states don’t even collect sales tax.
Okay, now that you know the basics, let’s get to it! These are the 5 numbers you need to know in your creative business right now!
1 – SALARY
The first number every entrepreneur needs to know is also one of the most forgotten in the creative industry that comes with pretty draining consequences. When you don’t pay yourself, you slow the process of going full time or meeting your financial goals.
The most common misconception I hear over and over is that we need to be putting as much money as we can back into our business at the beginning. Although I do agree that in the early days of business, we need to prioritize investing in growing our business, we also need to prioritize correct habits from the beginning. And that means paying yourself.
In order to make ends meet and take your business full time, you’ll need to know what your personal expenses are so that you can pay yourself enough to cover that. If you don’t yet have a personal budget, that’s step one!
Need help getting a personal budget set up? Try EveryDollar.com – it’s a great, easy-to-use online app! Any other Dave Ramsey fans out there? 🙋🏾♀️
For those of you ready to really see and experience the benefits of growth, I recommend also implementing a habit of putting aside profit from every bit of income you receive. I recommend 5-10% that you pay out to owners quarterly. Read Profit First for the full system behind this!
2 – BUSINESS OVERHEAD
The next number you need to know is your cost of doing business or your business overhead. This will include anything you spend in business whether you have any paying clients or not. A few examples of overhead expenses would be client management systems like Honeybook or 17Hats, website fees, insurance, tax accountant, education, etc.. I’ve got a lovely, simple spreadsheet for this that you can grab at the end!
If you have business debt, your monthly payments should be included in your overhead.
3 – JOB-SPECIFIC EXPENSES
You’ve got paying clients! What what!! 🙌🏼 You need to know what expenses you incur only when you take on a client. One of the first job expenses you’ll see is a credit card transaction fee if you accept credit (which I believe you should!). From there, you may have expenses like a booking gift, a second shooter for wedding photographers, printing costs for designers and the like. Everything from the coffee you buy at a consultation to the card you send after the service should be included!
In addition to expenses like the ones I just mentioned, you’ll also need to decide how much of that job-specific income will go toward Salary, Taxes, and Savings. I recommend you determine a percentage for these categories for ease of distributing when you get paid!
I personally allot 40% for salary and tithe from that amount to my church, 20% for taxes, 30% for business income/savings and 10% for profit.
Everytime I get a payment, I use my Income Breakdown Calculator (get access at the end!) to determine where my funds need to go. I have separate savings accounts for each of those categories: tax savings, salary savings, and profit. The Business income stays in my business checking account. Having the separate accounts and the calculator has changed the way I handle my business money and I’m never going back! It’s so fun to see all the dollars add up in my separate accounts and the peace of mind that comes with knowing I’ve planned for everything is priceless!
4 – TAXES
Ahhh, the curse word of the entrepreneurial world. Those sad numbers you see leaving your account every quarter or year can be incredibly depressing, but it’s just the way it is. So we may as well get on top of it, saving as we go, so that tax time doesn’t hurt! Okay, it may still hurt a little, but at least you’ll be prepared for it! 😉
There are two types of taxes you need to account for in your business. Income and Sales tax.
Typically 30% is the average recommended percentage to save from your income for taxes, but your tax accountant can give you a more accurate percentage based on your income level and expenses. If you don’t already have one, you need to hire a tax accountant TODAY. There are so many details and law changes that are just impossible to know as an entrepreneur that could save you money! The fee you’ll pay to have a professional do your taxes is worth its weight in GOLD! Seriously, friend. Hire a professional, and I mean an actual professional tax accountant. Not a big, impersonal company with an automated online form. Hire someone you can talk to in person to make sure your taxes are filed correctly and with wisdom!
Sales tax is typically around 6-8%, but each state and even each county does this differently. Call your state Department of Revenue for specifics as to your product or service and your local requirements. Hear me say this. Do not just rely on other entrepreneurs in your area. Get the facts from the belly of the beast and make sure you’re handling your taxes correctly! It’s important to note that sales tax is an amount you charge to the client in addition to the price of the product or service.
*Note: If you’ve never paid sales tax, you’ll need to apply for a sales tax permit first. Again, call your state Department of Revenue for the steps to take to get this set up.
5 – MINIMUM SALE REQUIREMENT
In order to make sure you pay yourself and cover all your expenses, you need to know how many clients or sales you need to take on to cover those costs. This will also help you determine if you need to raise your prices or if you need to market for more work.
To find this number, you’ll need to consider all the numbers we’ve already talked about above to determine how much gross income you need to bring in to cover those expenses. From there, you’ll look at the pricing of your product or service and divide the gross income need by the package price of your product or service to get the minimum number of clients or sales you need. Use my Job Expense Breakdown spreadsheet to help with this!
Gross Income ÷ Minimum Package Rate = Minimum Sale Requirement
You’ll have to do some calculating and trial and error to figure out what gross income you need to cover overhead and salary, but once you do, finding the minimum sale requirement is easy peasy!
For example, as a wedding photographer, if you need to bring in a gross income of $70,000 to cover your overhead and salary, and you charge a minimum of $4,000 per wedding, you need at least 18 weddings because $70K ÷ $4K = 17.5.
So let’s sum it up, shall we? In order to take your side-hustle full time or reach your big financial goals (like bringing your husband on in the business or buying a house) you need to pay yourself a salary that covers your personal financial needs and goals. After determining your salary needs, it’s time to look at your cost of doing business or overhead costs and know exactly how much you spend to keep the business afloat. In addition to your overhead costs, you also need to know what costs you incur when you take on a client or make a sale. These job-specific expenses always need to be covered in your pricing. Whether we like it or not, we all have to pay taxes, so make sure you hire a tax accountant to help determine what percentage of your gross income you need to set aside. And finally, taking all those costs into account, you’ll need to determine how many clients or sales you need to cover #allthethings!
Alright, friend. I know all of this can be a little overwhelming, especially if you’re not a numbers person, but just know that if I can do it, so can you! Math is not my strong suit at all! Just ask my 8th grade math teacher who gave me my first ‘C’ grade! 🙈Although spreadsheets are likely the last reason you wanted to run your own business, they’re still necessary and they actually will make your life easier once you get the hang of it!
And because I needed something to help me figure all this out, I created spreadsheets that do the work for me! Make sure to grab my free Google Drive Accounting Templates by clicking below to get started on your numbers!
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