Being on a budget is like being on a diet. For me, it would be great to sit around eating cheese every day for every meal. But, the reality is that I need to have some restraint. It’s the same story with your business expenses. No one wants to be on a budget, but a healthy business requires it.
This week we are going to cover the following to help you set up a budget, and more importantly, stick to it!
- The business expense MYTH
- Tracking your expenses
- Setting expense GOALS (budgeting!)
- Finding a system that works for you
The BIG MYTH
How many times have you or one of your fellow small biz owners said the following:
“It’s a tax deduction.”
“Oh – I’ll get this, it’s a tax write-off.”
“All of these expenses should make for a great tax refund.”
If you have uttered these words, listen (read) closely:
A business expense is a tax deduction. However, a tax deduction does NOT mean the government is giving you any money or that you will ever see this expense come back to you in any form of money.
HOW TAX DEDUCTIONS WORK
Now stick with me… I’m going to talk in numbers (don’t be scared).
Let’s say in one week you make $1000, and you spend $800 of it on supplies, phone bills, and rent. This is what happens:
– $800 expenses
$200 income that you will pay ~$60* of tax –> $140 income (money in your pocket)
But, if you spent $500 instead of $800, it would break down as:
– $500 expenses
$500 income that you will pay ~$150* of tax –> $350 income (money in your pocket)
By spending $500 in expenses instead of $800, you were able to make $210 more (after taxes). The ONLY benefit to having more expenses is that you pay less tax. The BIG downside to having more expenses is that you have less income (LESS money in YOUR pocket).
Now repeat this after me:
Tax Deduction means that I pay less tax. Tax Deduction = Business Expense. A business expense (or a tax deduction) results in less income.
You are a PRO!
Tomorrow, we’ll go over some AWESOME systems for tracking your expenses. (Hint: there are some really cool, fun, online sites that make this easy-peasy.)
* For purposes of this example, the tax rate is 30%. It would largely depend on the annual income and the individual’s tax bracket.