This is a great thing to consider! You want to be able to pay yourself, but you don’t want to be transferring money back and forth all of the time trying to cover expenses either.
So how much should you keep in your bank account?
The principle I recommend is to keep enough to cover next month’s expenses BEFORE next month comes.
Practically, it looks something like this:
Income for January: 40,000
Expenses for January: 25,000
Net Income: 15,000
Based on this example, you would always want to have 25,000 in the bank. This assures you that you will have enough money to cover expenses EVEN IF you don’t make any money for a whole month.
Is it difficult to keep 25,000 in the bank? Absolutely! It’ll seem like that money is just sitting there, not being withdrawn for your personal use, and not being invested back into the business.
BUT will you be covered when the government shuts down your business due to an unforeseen pandemic? YES.
If you wanted to get started with a smaller step, then only count the expenses in your business that are recurring, such as rent, payroll, utilities, and contractors. Or decide ahead of time what could be cut out in times of emergency, and only count those expenses that are truly crucial to stay afloat.
Regardless, you should have enough money in the bank to keep you from fretting.
For me, that meant building up my bank account to where I always keep enough to cover my expenses AND my personal paycheck. That way, I know that even if I don’t make any money in a given month, I still get my paycheck for that month, and so does everyone else that expects payment from me.
In order to accomplish this, you can take a smaller paycheck than normal, raise prices, seek out better vendor prices, or cut out unnecessary expenses. When more money comes in, don’t take that money out or use it for something else: save it for a rainy day.
It could take months to build up your account to where you want it, but don’t despair. You’re an entrepreneur. You built your business. You can do this.
Need help figuring out how much your expenses are each month? What your true crucial expenses are?
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