Do you feel like running your small business’s finances is starting to feel like juggling? Things can get real in a flash between bill payments, investing in growth, and stashing away an emergency fund.
That is where the 50/30/20 rule comes into place and can serve as a guide to organize your funds better. You might have known it as a personal budgeting approach, but it works quite effectively for a small business too. It is simple, pragmatic, and works out without putting too much strain on yourself to keep your money under control.
Let’s delve into how this works and how you can apply it to your business.
What Is the 50/30/20 Rule?
At its core, the 50/30/20 rule is all about dividing your income into three portions, namely:
- 50% for needs: Must-haves that keep the wheels greased.
- 30% for wants: Think of it as the fun or growth bucket (investments that aren’t essential in your business).
- 20% to savings: This is your safety net, reinvestment fund, or debt repayment plan.
What’s beautiful about this rule is its simplicity. It gives you a clear-cut structure on how to handle your money so you can focus on the most important thing: growing your business.
Applying the Rule to Small Businesses
The concept is simple, but how exactly do you apply it to your business? Let’s break it down.
50% for Needs
This is where the majority of your income is allocated. Needs are the things that keep your business running. For example:
- Rent or lease payments
- Employee salaries
- Utilities-internet, electricity, etc.
- Raw materials or inventory
- Insurance
Ask yourself, “What do I need to keep the doors open?” That’s what goes into this category. Keep a close eye on these expenses, and don’t let them creep above 50% of your revenue.
30% for Wants
This is the fun part and you can use it for all of those things that aren’t strictly necessary but help your business grow or stand out. Here’s what might fall under this category:
- Marketing and advertising
- Employee perks, such as training programs or team outings
- Technology upgrades
- New tools or equipment
The key here is to spend strategically. Sure, it’s tempting to go all-in on a fancy new website or a big marketing campaign, but always ask: “Will this help me grow in a meaningful way?”
20% for Savings
Savings are your safety net. Savings for this category can include building an emergency fund for unexpected expenses, paying down business loans, and reinvesting in the business.
Why is this so important? It’s because saving provides room for breathing. It gets you through the slow months, enables taking advantage of new opportunities, and handles unexpected setbacks with less panic.
Many tools can help you figure out the numbers exactly. To get an outline of your budgeting, start with the simple 50/30/20 budget calculator and refine the numbers from there.
Why to Use the 50/30/20 Rule?
So, why bother with this method? First and foremost, it’s simple. You don’t have to have an MBA to figure it out. It will also save you from spending too much in one area and not enough in others, like the marketing budget for example. And most importantly, it’s flexible: you can adjust it as your business grows or your priorities shift.
How to Get Started
Ready to try the 50/30/20 rule? Here’s how in four easy steps.
1. Evaluate Your Income
First, identify the amount that comes in with your business in a month. Again, be straightforward and realistic to the core. Look at the books and work out an idea of your average income.
2. Categorize Your Expenses
Next, get a clear view of where your money’s going currently. Label your expenses by needs, wants, and savings. You may be surprised by this process. Is more money going to wants than you’d thought? That’s okay; at this stage, it’s about making sense of financial habits.
3. Set Your Budget Targets
Now it’s time to apply the rule: Divide your revenue into 50%, 30%, and 20%.
For instance, if your monthly revenue is $10,000:
- $5,000 for needs
- $3,000 for wants
- $2,000 for savings
4. Track and Adjust
Finally, track your spending to make sure you’re sticking to the plan. Business finances are always in flux, so be prepared to adjust as necessary. Perhaps you had an unexpected expense one month, or your revenue took a dive. That’s okay; you just need to recalculate and move along.
Small business finances don’t have to be such a headache. The 50/30/20 rule gives you a clear, simple framework to follow. It’s not about perfection; it’s about progress. So why not give it a shot?
Start by evaluating your income, categorizing your expenses, and setting those budget targets. And don’t forget to use our calculator to make the math a breeze. Your future self will thank you.
