I've been doing business finance all wrong

Here's what I did wrong and how I changed it

Hi Friend,

Like this puppy, I was barely keeping my head above water. Photo by Darren Richardson on Unsplash

Business finance is one of those areas many business owners don't fully understand.

Myself included.

I get the principle that the money coming in should be greater than the money going out if I want to get ahead. But that’s like saying I understand that calories coming in should be less than those expended if I want to lose weight.

That is to say, I understand it in theory, but making it work in practice is another matter when there are so many delicious treats to be eaten, and it was just Easter so I got a lot of yummy chocolate, and also I love chips and pasta and am basically a Cookie Monster, but with all carbs.

And now I’m hungry.

Short story made longer, I understand the idea behind making money (and weight loss) but making it work in life is something of a struggle. Just as I’m always trying to lose the same few pounds, I also never feel like I’m ahead financially. I have just as much to show for the years I make a ton of money as those when I make very little.

Recently, I talked to an advisor and learned I was looking at my finances all wrong. Or at least, I had a misguided view of how I access and spend my money (which isn’t all that surprising, given how I was raised—I got a lot of my money attitudes from my parents, who were wonderful in many ways but not great with money, so now I need to break the cycle).

Here’s what I was doing wrong

Although I’ve had a business bank account for years (yes, you really must get one), I haven’t fully separated my business finances from my personal.

Here’s what I mean: Any money I get paid goes into my business bank account, which I use for business expenses. I pull money from that business account to put in my personal account for personal use. So there is a separation between business and personal finances (Revenue Canada will breathe a sigh of relief at this, and so will my accountant).

But here’s where it gets murky: As I needed money for bills, entertainment, travel, or savings, I would just pull money from my business account, pop it into my personal account, and then use it. If there was enough money in that business account to cover an expense (such as spontaneous travel or a concert), I said “yes” to it, transferred the funds and paid for it. This meant every month my business account got close to zero before more money came in.

Is that legal? Sure. I’m not incorporated and the money my business makes (minus taxes) is mine. But doing it my way makes it very difficult to get control of my finances because I treated my business bank account like an extension of my personal finances, rather than as a business account.

This had three significant consequences:

1. I wasn’t connected to my expenses. I just kept spending until there wasn’t money, waited for money to come back in, and went back to spending. My decisions about where the money went had less to do with any sense of priorities and more to do with whether there was money in the account. I spent it with the attitude that I could make more “tomorrow” to cover what I spent today.

2. I didn’t get ahead because I only said “no” to expenses when the money ran out, which it came close to doing every month. Otherwise, I gave a lot of very enthusiastic “yeses.”

3. I was constantly stressed about money because I was basically living month-to-month and I was always trying to catch up, rather than feeling like I was ahead.

*A note: I was able to build up my savings, which was very helpful when things were slow and when my dog needed emergency surgery. But I still didn’t get as far ahead as I could have.

The solution

Thanks to my chat with my advisor, I’ve shifted how I use my business bank account. Instead of pulling from it as I need, I set a budget for how much money I’ll need monthly for things like:

• Mortgage

• Bills

• Food

• Savings (including RRSPs)

• Credit payments

• Entertainment (eating out, going to events, having fun)

• Other necessities

That money gets pulled from my business bank account in regular chunks (on the 15th and last days of the month). Essentially, I’m paying myself a salary. Extra money is left in the business bank account. I’ve also set up personal bank accounts for specific purposes, such as saving for travel.

The amount I pay myself doesn’t increase just because I make a little more in a month.

This system does a few important things:

1. It enables me to build up a bit of savings in the business bank account so that if I have a slow month, I can still pay my wages. It’s a buffer before I have to dip into my savings account.

2. It provides a safety net if something unexpected comes up, such as an unusually high income tax bill, a business opportunity, or professional development courses.

3. It provides me with additional warning if my business isn’t making as much as I need it to make. If I can’t pay my salary in a month, I know I need to get back to marketing myself or bring in more money somehow.

4. It forces me to pay more attention to my expenses and prioritize those items that are most important to me. I can’t say yes to everything just because there’s money for it. Instead, I have to choose what’s truly important to me. This also helps me save money and cut back on spending.

5. Perhaps most importantly, it allows me to get ahead financially because I’m taking my finances more seriously.

I know I’m not the only one who has used their business bank account as an extension of their personal account (because I asked people for their advice and was told they do exactly that). However, if you want a business that thrives and you want some control over your finances, paying yourself a regular salary from your business bank account will help you in the long run.

Here’s what to do

1. Set up a business bank account if you don’t have one already. For so many reasons, you need one. Even if it’s not mandatory for you based on the type of business you run, your tax agencies prefer it because it gives a clearer distinction between business and personal expenses. It’s also so much easier for preparing taxes.

2. Create a list of your monthly expenses, including bills, entertainment, various savings accounts, and so on.

3. Set your monthly salary based on what you need to survive, enjoy life, pay taxes, and save a bit for the future.

4. Designate specific days that you withdraw money from your business account to pay yourself a salary.

5. Refine your system (and your salary) as needed based on whether you’re pulling enough to survive, when your bills are due, and when your clients pay you.

If you’re like me and you get all sorts of pay at random times of the month, it might take you a few months to move to this new system. I’ve started by pulling set amounts of money each Monday until my business bank account has enough in it at the middle and end of the month to cover my salary.

And if you’re making the same mistake I was, don’t be ashamed of it. Many freelancers have done it, and it’s never too late to get control of your finances. If you start today, you’ll be surprised at how quickly you’ll feel more financially secure.

For those of you who love to learn about writing, my good friend and fellow writer, Kathleen Rake, has started a wonderful newsletter with quick and easy tips for improving your writing. She’s brilliant and I highly recommend subscribing (I’ve already learned a lot from her newsletter and implemented many of her suggestions).

And I’m continuing with the coworking sessions, which have been incredibly productive for me. If you’re interested in joining for the remainder of April, comment on this newsletter or reply to it to let me know and I’ll add you to the list. We meet each Wednesday at 9:30 am Pacific (12:30 pm Eastern) for two hours, broken into 3, 30-minute work sessions (but you don’t have to stay the whole time if you aren’t able to).

Here’s to your ongoing freelance success,

Heidi