Many of us may have been taught to budget our money month-by-month. Most of us learned elementary-level lessons on money at a very young age – counting coins saved up from our piggy banks or filling out worksheets with pictures of dimes and nickels in the first grade. Even our moms and dads punched numbers on large boxy calculators every month, figuring out grocery budgets, allowances, and other expenses. But when did our financial learning stop? Why did we study how to manage basic income versus expenses only? Why didn’t we learn more advanced methods? Is that knowledge strictly reserved for Business School?
Sadly, the majority of us are left on our own. If you’re self-employed, you’ve got a lot of trials and tribulations ahead. Even if you have enough capital, not knowing strategic financial planning can be your downfall. It’s like winning the lottery and not knowing how to allocate the funds to grow and grow. One day it may dry up if you’re not careful.
While we aren’t professional financial advisors, we can share our own experience or lessons around money management. The greatest tip we can offer as of right now is to look ahead – quarter by quarter.
Why This Works
When all your income sources and expenses are listed out, by one month at a time, you’ll only be seeing with tunnel vision. It’ll be difficult to see just how much you can save or invest this month because you can’t see if the net profit is growing or shrinking.
When you put your data in at least three months in advance, you’ll get to see if the ending balance is rising or going into the negative. For instance, let’s say you’re planning only one month at a glance and you want to save $500 per month. Before inputting your take home payroll (after taxes), you’d add a column in your database or record table to invest in yourself first. So, you’d label the column “Savings” and place $500 in the appropriate field. Month-to-month planners would call that a day. Quarterly planners would play a little more. How? By repeating the same data for the next two months.
To get an appropriate ending balance, be sure to always know your starting balance after all expenses, savings, and payouts are done. Use formulas that add income and subtract expenses.
Example:
To apply the formula, click in cell B7: =B1+B2-B3+B4-B5-B6 then hit Enter.
Now you want to make sure the Starting Balance for the next month is equal to the Ending Balance of the month prior.
Example:
To apply the formula, click in cell E1: =B7 then hit Enter.
Any changes made in the month prior will now be reflected in the month ahead. If you need to add new income or expenses, simply adjust the formula.
Notice what happens to the Ending Balance at the end of the quarter when we add the third month, it’s growing:
The formula should have automatically applied since the software noticed a pattern.
You will see in cells D3 and H3, our PGE bill varied. Not all bills are the same each month. You can also tell that the money grows despite the highest PGE bill (summertime). With this data, you’ll be able to save more and forecast future expenses and savings, or pay off debt, based on an estimated higher bill.
The most important points to take in are:
- Is your “savings” (or self-investments) best at the monthly goal you set, or can you go higher? Or, if finances are decreasing each ending balance, should you go lower?
- Your goal should be to see the Ending Balance growing or at least remaining the same until it grows. This will help you make better strategies in how you conduct your business.
Why Quarterly?
If you didn’t get the point above, then let’s lock it down now. Money is energy. As we know, energy fluctuates. It’s high and low. There is never a guarantee on the numbers you see. One month you get another client, which may also increase expenses in software, fees, and contract workers. Another month you may lose two clients, also changing your expenses. Either way, adjustments need to be made and seeing the ending balances’ growth or drop is your visual cue to whether you’re still operating in the green.
Planning month-to-month does not give you this advantage, so it becomes difficult to identify the true potential of your savings budget. It also prevents you from making strategic moves in this quarter to maximize your profit in the future.
You can try to plan an entire year, but from our experience, we’ve faced many changes within our business, it has become too difficult, and irrelevant, to plan for the long-term future. This is not to be confused with future planning for retirement or life insurance, as that will require a licensed professional. We’re talking about your current day-to-day books that run your operation. It has been a waste of time to predict outcomes 12 months from now. We have benefited from six months’ planning, but still, we find managing funds quarter by quarter the easiest and most beneficial.
Tips
- Invest in a bookkeeper or CPA who is there to mentor you and instruct you while you study. You still need to take some control and oversee your accounts. Know what’s going on.
- Find your own way to reconcile accounts – one you love and find fun! Ignore the hype around the best tools and make sure you use one you’ll, well, use.
Financial planning isn’t just about making more money; it’s about strategizing how you serve others and what you do to benefit your clients and yourself more. By planning with the near future in mind, you can filter out what doesn’t serve you, your team, or your clients anymore. And each quarter that goes by, you refine bigger and better goals.