TRANSCRIPT 🔗
Ep28
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Welcome
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[00:00:00]
Bryan Steele: Welcome back to the podcast. I'm glad you're here with me today. I talked a little bit last week, I teased that today we're gonna get a bit more practical, a bit more tactical in how to handle the money that's within your side hustle. Now, when you're managing your expenses, what we talked about early on, it's gonna be pretty simple.
You could even likely do it in, in a spreadsheet. Separate your income and your expenses. Track those things separately from a separate bank account. But that's a far cry from strategy, and as you keep going, it's going to be important to make sure that you manage your money wisely. And so I want [00:01:00] to, today, give you some real strategies around that.
Why P&L Falls Short
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Bryan Steele: Now, at the end of every quarter, at the end of every year, when you're meeting with your accountant, your CPA, you're doing your taxes, when it's just you and it's just some extra income you're building, it's just a sole proprietorship. It's just something that's going as a separate item on your Schedule C that you can track there.
Now, I'm not a CPA, I'm not an accountant, so for your own situation, talk to those people. But generally, what they're gonna want to see is some sort of a profit loss statement. Profit and loss is a common record of, this is the income I made, this is the money I spent in the business. And when you track all of that within a single checking account, that gets pretty easy to manage.
You say, "Here's all the money that came in. Here was the expenses that the business had. The leftover was the profit that we were able to take." But here's the problem with the profit and loss statement. One [00:02:00] is it's complicated. Some things go in different buckets and where it gets categorized, and so it's a little trickier.
~And it... The... But,~ but the real problem Is that it's backward-looking. It means at the end of the quarter, at the end of the year, you're looking back on how things have gone with the business, how the money has been managed. That really doesn't help you in the day-to-day, and that's what I wanna help you with right now, is thinking about how to manage your money in the day-to-day situations with your business, so you know how much can I take out, you know, with my goal of sending my kids to college.
Like, the business is doing well. How much of that money do I need to set aside for taxes? How much of that money do I pay myself? Those are important decisions that you're having to make, and trying to do it at the end is the wrong place.
Profit First Mindset
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Bryan Steele: So there's a, a fantastic book that I have enjoyed and I recommend.
It's called Profit First [00:03:00] by Mike Michalowicz. And he takes essentially what is the framework for a business that has historically been used, which is income minus expenses equals profit. Profit is what's left over ~at the begi- uh,~ profit is what's left over at the end of that equation, and it's the most common thing that people think of.
He wants to flip that equation and say, "Sales minus the profit that I wanna take out of the business equals my expenses." And why does he do this? Because he wants to make it clear that you are the business owner, and you should benefit from taking the risk and running the business, and so you should plan to make a profit from day one.
Profit is not the leftover item at the end of a business. Profit is the intention of the business. [00:04:00] When you're thinking about sending your kids to school, when you're thinking about paying off debt, that is the intention. And what's left behind, so the sales that you make or the revenue that you make minus that profit, leaves you with the expenses that you have to run your business with.
It constrains the business operations to operate within their intended domain. You're not just spending money for s- spending money's sake. You don't go crazy with advertising when you don't have the money for advertising and end up with a business that's not profitable at all. So he first flips that equation.
I think that's great because I think when you're in the seat you're in, and you're thinking about how you're going to do this, how you're going to build a business, planning to be financially successful from day one is absolutely critical or else you've just made a job that doesn't benefit you in any way, shape, or form.
It's just painful. [00:05:00]
Four Bucket System
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Bryan Steele: So what he does is he says every business has a handful of buckets. So you get paid, and you put them initially, when you're a small business, in one of four buckets. It goes towards your profit, it goes towards your owner's compensation, it goes to tax, or it goes to your operating expenses or your OpEx account.
Four buckets for every dollar that you make, and you, ~uh,~ set aside a percentage. Now, in the book, he gives rough percentages, but he says, "Hey, look at what you've got. What are the percentages now? What is the ideal percentages?" He walks through all of those pieces, and that's something you can kind of manage yourself.
So I don't think it's really necessary that we walk through that. But the idea is that you give every dollar you make a job. It gets broken up into those areas. So you know you need to be saving some money to pay the extra taxes. You know you need to save some money for the operating [00:06:00] expenses you're gonna have.
Now, because this is a side hustle, your profit and your, ~uh,~ owner's compensation are... They can generally be considered the same thing, right? If this is not money you're necessarily trying to live off of, it's the extra income that you're using to put towards major financial goals that you have, then you might bucket those into the same thing.
It's, maybe it's just one giant profit bucket for you, and that's fine. You can split it up. You can combine them. That's really your prerogative. You
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can kind of do whatever you want with that.
Account Friction Problem
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Bryan Steele: Now, in the book, he outlines how you structure this with multiple accounts, so you don't go cheating and take money from Peter to pay Paul, right?
We don't want to be pulling money out of profit to pay some unexpected operating expense. We want to force constraints. We want to do that. The problem with that is you are a [00:07:00] busy person, and trying to do what he lays out, which is twice a month going in, shuffling money from where it came in to profit buckets, to tax buckets It just gets complicated, right?
And, and it's a little bit, a little bit hard to manage. That's additional friction for implementing this system. Now, if you were a full-time business owner, and this is what you did, I don't, I don't think it's a huge lift. It's a couple of, ~uh,~ steps each time. You go through your accounts, you figure out how much goes to each place and, and you make the transactions.
But it is some burden, it is some friction, and we want to remove as much friction from our business as possible so that it's easy to run our business.
Automating with Novo
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Bryan Steele: Which is why, for me, I started using this app called Novo, and I put... got a business checking account through Novo, so it's backed by a bank, ~um,~ and is basically a [00:08:00] traditional business checking account.
The difference with this is that instead of having multiple accounts, it actually has a software app front end which automatically takes the income I make and splits it out between those buckets. So I set the percentages, and every dollar I make automatically gets moved in those places, and anytime I pay for something with that account, I use my debit card, 'cause they'll send you a debit card, use the online account, pay digitally, whatever it is, it goes out of that checking account, and I can categorize those expenses.
So when I pay for some software, I go back and I look at the account, comes through, here's the transaction. I go into the transaction, and I click it, say, "That was from my operating expenses." When I pay myself out of the business, I go in, I say, "That was owner's compensation or profit." You know, [00:09:00] I'm taking profit, I'm saying, "This is coming out of the profit bucket."
Real Time Money Clarity
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Bryan Steele: So when I'm moving money to my personal account, it's giving me that ability to target those specific buckets The reason why I think this is powerful is the instantaneous perspective that you have on your business. It allows you, any time you open your business checking account, to instantly see how much money do I have to work with?
How much profit have I made to put towards my goals? How much money do I have to pay the business expenses, the bills that will come through the business? If I have to pay for inventory, if I'm having to pay for software packages, or I'm wanting to hire a vendor to help me with my marketing, it gives me a real-time snapshot of what I've got available to spend on those things without taking on debt or any of those pieces.
So it gives you [00:10:00] a, a clear vision of what it is you have to work with in your business, and I think that that is so powerful. When a profit and loss statement just looks backwards, that gives you a real-time insight into where you're at. You see how much money has been set aside for taxes, and you know it's there, and you know when the time comes at the end of the year, you do your actual profit and loss statement, you send it to your accountant, they do all the paperwork things, and they say, "You owe X amount in taxes," you just take it out of there.
If you're doing quarterly estimated payments for your taxes just to try and get closer, you can look at that account and say, "Okay, this is how much based on what I think I'm gonna need to set aside 15, 20% of every dollar that comes in. There's that bucket that I can use to pay the expected state taxes, the expected federal taxes."
It just gives you a lot more clarity in the, in the moment that you can use to [00:11:00] run your business with. Now, it's not an accounting software. It's not something your CPA uses. But just as a business owner, to have a snapshot of where you're at is incredibly valuable, and it expands. Like, it, you know, there's those handful of buckets initially, but as you grow and as you get more sophisticated and complicated, you can create additional buckets for payroll, for, ~uh,~ if you're going to have raw material purchases or, or different things.
Like, you can get as granular as you need to with this sort of system. But at its core, those main four buckets are gonna give you everything you need so you have a vision for where your business is going to be heading, and I think that is something incredibly powerful.
Next Steps and Resources
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Bryan Steele: So two things for you. I want you to think about that.
Are, how are you tracking money? How are you managing to [00:12:00] set aside money for taxes? How much of it is money that's coming to yourself? How are you managing your expenses? So when a dollar comes in, does it have a job as far as, you know, going to your profit? Are you collecting that profit every time? Or, you know, are you just paying the bills and not really thinking about it, and money is just haphazard in the business?
~I think having that plan~ I think having that plan is really good of understanding where you're headed. So you can look at the book, Profit First. You'll find a link to that in the show notes, so you can read about it, maybe get a good idea of what percentages make sense for your business. But I do highly recommend that book.
I think it's valuable. And if you go, "I like the idea. It sounds overwhelming to implement," I would strongly recommend this, this fintech app, this Novo app, having a business checking account through them. I've been using it myself for over a year, and it's been really helpful to just give me a [00:13:00] clear line of sight into where the business is.
Eliminates a lot of that friction for just having multiple accounts, and so I would recommend it. So you'll also find a link in the show notes to that. So if you wanna check that out, go ahead and do it. ~Um,~ I do get a... If you sign up, I think you and I both maybe get a, a small little, ~uh,~ commission from that, but, ~um,~ just to be fully transparent.
But it is something that I myself use, so it's not something, you know, I'm sending you to ~with- without, ~without, you know, just to collect a paycheck. It is something I do, ~uh,~ regularly in my business, and I think it helps me out. And if this sounds interesting to you, if, and you think it would help you manage the money in your business better, I think it'd be worth it.
Wrap Up
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Bryan Steele: So hope this helps with your business. Go implement it. Go figure out how you're going to give your money a job, and how you can give yourself better insight into knowing where your finances are in a moment. Thanks, and I'll see you next time.
[00:14:00]