We’ve all heard it: “You’ve got to spend money to make money.”
That darned, annoying phrase. It’s the one that bad business coaches like to guilt us with when we say we don’t want to make such a huge investment. And the one that, unfortunately, puts a lot of well-meaning, optimistic solopreneurs into a solid amount of debt much faster than they realize. Here’s a crash course in budgeting your business.
Sometimes business debt can be a good thing — especially if it represents something that you’ve deliberately chosen to borrow to grow your business to the next level (and you have a payoff plan in place). But a lot of times, your debt represents a collection of bills that have piled up faster than you could manage to pay them over a number of months. Which sucks, no?
When I looked at the balance of my business credit card and saw over $5,000 in debt, I felt like I got the wind knocked out of me. There was no way I could afford to pay that off in full, and I hadn’t realized just how quickly not paying everything off in full for a few months while I “caught up” on my personal finances would come back to punch me in the chest.
It was uncomfortable, and a bit sickening. I knew where maybe $3,000 of that debt came from, but the rest? Just normal bills that weren’t justifiable to not pay off each month. So, a bit sick to my stomach, I got serious and put my business on a budget. And not just any budget, the “worst” kind of budget I ever remember my parents telling me about: the envelope system.
The Envelope Budgeting System That Used to Make Me Cringe
The reason I dreaded the envelope budgeting system is this: On the surface, it’s so limiting.
You take the money that’s already sitting in your account, and put it into “envelopes” based on your bills. Back in the day, people would use literal envelopes for this, but today you can just get a budgeting software to do it for you.
Once you spend the money out of one envelope, that’s it, you can’t spend any more money in that category for the month. And, for the most part, once you decide how to spend your money, you can’t change your mind.
Of course, this sounds limiting, but if you’re a solopreneur with $5,000 of business credit card debt, it’s kind of what you need.
Get Out of Debt and Make Profit-Based Decisions
For me, budgeting on the envelope system has helped me allocate more money toward paying down my debt — while also helping me escape the “you need to spend money to make money” guilt spree.
When I see where my money’s going and where it’s not going, I can establish my priorities in a very specific way. It’s confronting, yes, but it’s also freeing to realize that I’m getting out of debt and making more profit-based (rather than spend-based) business decisions because of it.
Realizing You Can Afford Growth
When YNAB (You Need a Budget) founder Jesse Mecham moved his business finances over from traditional business accounting software to YNAB’s envelope budgeting software, his business really started to grow.
Within two years’ time, they went from a team of seven employees to a team of 27 — with the business growth to show for it.
“It settled my stomach,” Mecham writes, “and helped me conquer the natural risk aversion I had to hiring people, and growing the business.”
As someone who’s a risk-avoider, knowing his numbers and the money he had available for different envelope categories helped Mecham make smart, calculated decisions that he may have otherwise written off as “too risky” or “too expensive” (even though they weren’t).
Get a Business Off the Ground Without Debt
Lisa Hoashi left the nine-to-five reality to follow her heart and her love to Spain, where she realized she needed to set herself up as a solopreneur if she wanted her dreams to come true.
She also knew she didn’t want to go into debt, so she got an envelope-based budgeting software, took the money she had available to get her idea off the ground, and budgeted it out into “envelopes” for months in advance.
“The more exact you can be about expenses, the better,” she says. “Take stock of what the numbers are telling you. What are your biggest expenses? Can any be postponed, lowered or eliminated? How long can you go without making any income? What’s your plan if you run out of start-up funds?”
Asking these questions forced Hoashi to focus on profit so her business wouldn’t be one that failed in the first few years due to money problems.
Budgeting Your Business: Profit, Growth and Becoming Debt-Free
If you’ve already got your business finances on lock, you might not need to develop a specific budget. But if you’ve got a financial situation you want to turn around ASAP, an envelope-based budgeting system may be the perfect solution. If nothing else, I’d suggest trying it for a couple months to see how it works for you. I think you’ll be pleasantly surprised by the benefits you uncover.