I’m sure you have heard of the 80/20 rule. It’s a business rule that says 80% of your business comes from 20% of your clients. Although there is room for error with these percentages, they tend to sit around these general numbers. The best thing about the 80/20 rule is it can be applied to just about everything in business, and our budget plan will be based on these basic budget percentages.
We are going to work through applying this rule to your business finances, so you can turn the 80/20 rule into the basis of your budget plan.
Let’s take a look at how it’s done, and how you can create a budget plan.
The 20% portion of our 80/20 budget percentages plan comes down to savings. No matter what you do, you want to make sure you are saving at least 20% of all the money that is coming through your door. This will put you in a great spot when tax time comes around. Instead of drowning in the thought of putting your tax bill together, you can simply save 20% of your income for everything you sell.
When it comes down to paying off your tax rate, it’s important to remember what tax rates are for your business. If you are a normal small business, your rate generally sits at 19.8%. If you are a sole proprietor, you will pay 13.3%. If you are a small S Corporation, you pay 26.3% on your tax rates. Make sure you know what your business is classified under, so you can save accordingly.
We say you should at least save for the 20% mark because of the high tax bills that come the same time every year.
The Other 80% of the Budget Plan
The other 80% of your income should come back to you and the business. This portion of your budget percentage plan should account for everything else you need covered. From expenses to new equipment, you should work to budget your income to these guidelines.
Many top fiancial advisors teach a methodology called the 50-30-20 rule. This rule splits our 80% spend category into two major categories of spend: need and want.
50% of our Budget Plan is Need
When it comes to what you need, you should only be spending up to half of what you are making. Again, this is just a general number, and if you can operate at a lower, that’s great. Just be prepared to pay more if you don’t exactly need more.
When it comes to what is needed in the budget, you have to start looking into your true expenses, or the items that need to be paid. This should be items like rent, employee costs, business expenses, utilities, software, office toiletries, supplies, and so on. Anything that you need to pay to continue operations needs to be accounted for.
30% of the Budget Plan is Want
Want is a special area that is rather liquid when it comes to calculations. The reason being, want fluctuates with what you want at the time. If you get a new car, you will factor in monthly payments into this section. You can also use this portion of your budget to save up for a car, so you can buy it outright.
The liquid nature of this 30% of your budget leaves you a big portion of your budget to work with. Maybe you don’t have anything you want, and all your needs are currently handled. That leaves you a great opportunity to save this 30% in case of emergencies. If you don’t run into any emergency situations, then you get to save that much more! Go ahead, take your family out to celebrate!
Budget Percentages Will Put You On the Right Path Financially
If you are looking at this and thinking that this is an oversimplified way of looking at a budget, you’re kind of right. It’s an oversimplified overview of a budget, but it’s the bare bones of the process. The three core components of a budget percentages plan are taken care of, and even doing a simple process like this can put you so far ahead of your peers in terms of financial planning.
When you are budgeting for yourself or your business, everything in your life will fall into one of these categories. Just take some time to really think about the item at hand, and whether it falls into the category of need or want. Once you have all of those down, see how much you can save. If your finances aren’t close to that 50-30-20 style rule, it’s time to sit down and really think about how and where you can save money.
If you are lost, you can always reach out to us here at Excellent Admin. Our team can help you every step of the way. Let Excellent Admin give you a helping hand with your budget plans and financial forecasting. Contact Excellent Admin.