Developing Perspective

#99: Handling your Finances.


00:00:00   Hello and welcome to Developing Perspective.

00:00:05   Developing Perspective is a podcast discussing news of note in iOS development, Apple and the like.

00:00:07   I'm your host, David Smith.

00:00:12   I'm an independent iOS developer based in Herne, Virginia.

00:00:13   This is show number 99, and today is Thursday, December 6th.

00:00:16   Developing Perspective is never longer than 15 minutes, so let's get started.

00:00:20   All right, so similar to what I did on Tuesday's show, I'm going to do a bit more of a practical show today.

00:00:23   I hope trying to get down in the weeds and really work through some topics in great detail.

00:00:29   That's kind of what I think I'll be doing for the next little while.

00:00:32   But today I'm going to be talking about, I guess you could call it the logistics or the

00:00:37   accounting or the sort of the business side of being an independent business.

00:00:43   And whenever you talk about this kind of a topic, it's always worth certainly saying,

00:00:47   A, this probably only applies to people who, or applies most closely to people who live

00:00:51   in the US.

00:00:52   A lot of the things I'm talking about are based on the way business works in the US.

00:00:56   Many of them may even be based on how business works in Virginia, where I live.

00:01:00   I'm neither your accountant nor your lawyer, but always wise to seek advice from people

00:01:04   like that or to be confident in your choices based on your own research before you do anything.

00:01:09   But this is kind of the experience I've had.

00:01:10   I've been doing this for quite a while, so hopefully some of the insights I've had and

00:01:15   kind of how I do it will be helpful.

00:01:17   So without further ado, so basically when I'm talking about the sort of the financial

00:01:22   side of a business.

00:01:27   It's at its core, is just about how you manage the money

00:01:28   of a business.

00:01:32   And at the end of the day, a business is all about money.

00:01:33   That's sort of what you're, you know, it's all about are you

00:01:38   able to make a profit from the work you do?

00:01:40   Are you able to generate more income for a smaller amount

00:01:43   of expense?

00:01:48   That's all business is at the end of the day.

00:01:49   Anything that gets more complicated or sophisticated or

00:01:49   thinks it's cooler or cleverer than that, it always makes me a little nervous.

00:01:52   Business is just about bringing in more money than you put out.

00:01:57   And so, this is kind of how you sort of approach that.

00:02:01   First, I've heard from a lot of people who listen to this show who are independents or

00:02:06   hobbyists, you could call them, or people who are thinking about getting into this.

00:02:10   And the first thing I want to say is that it's very important that you treat your business

00:02:14   like a business, because if you don't, no one else will.

00:02:19   And your accountant, your lawyer, the IRS, which is the Internal Revenue Service here

00:02:23   in the US, the people who come and collect the government taxes from you.

00:02:28   But I say that because one of the best advice I ever got when I was first starting out was

00:02:33   that you have to separate your personal finances from your business finances.

00:02:39   That is an absolute essential thing in order for you to be able to be successful in business

00:02:43   is to separate those two and treat your business like a business.

00:02:46   It has its own set of books, it has its own accounts, it has its own philosophy and schedule

00:02:52   and philosophy for managing its finances that may be different than what your personal goals,

00:02:58   finances, and structure would be.

00:03:03   Businesses have different goals, businesses have different needs, and so you have to treat

00:03:07   them separately.

00:03:08   And so the first thing you always have to do, and this is, I think generally would be

00:03:12   applicable, is that you really need to create a separate account for your business that's

00:03:17   separate from your personal.

00:03:18   If you're special, if you're starting out, it can seem a little silly, but it's one of

00:03:23   those things that I feel like was the most important thing in setting up the financial

00:03:28   sort of groundwork for my business was creating its own account.

00:03:32   And the primary reason for that is that it lets you very clearly see how you're doing.

00:03:36   say you create, opening a business, opening a business account, or even just a separate

00:03:41   personal account, the exact details don't matter as much as there being a separate place.

00:03:46   What that allows you to do is, all the money that goes into that is income for your business.

00:03:51   All the money that comes out is expense for your business.

00:03:54   You can very easily take care of that, and you can understand it and you can look at

00:03:57   it.

00:03:58   Say you seed your business with whatever it is, $100, $1,000, depending on exactly what

00:04:03   you need.

00:04:04   You seed your business with a certain amount of money.

00:04:07   And then the amount you are above or below that is how well your business is doing at

00:04:10   that time.

00:04:11   Very simple, very straightforward.

00:04:12   It's not a lot of accounting, bookkeeping, fancy things like that.

00:04:16   It's just how much money is in the account.

00:04:19   And that's something that I found was very helpful early on to help me kind of wrap my

00:04:24   head around it.

00:04:25   And the second thing that really, really helps is that it makes bookkeeping so much easier

00:04:31   because all I had to do initially...

00:04:33   At this point now I have someone who does my books for me and I have an accountant.

00:04:36   When I was starting out I was doing it all myself, just an Excel spreadsheet even.

00:04:40   Basically, it was very easy for me to run my books, to categorize my income, do all

00:04:46   those things, because every financial transaction that in any way was related to the business

00:04:53   of my business was in that ledger.

00:04:57   That made my life so much easier.

00:04:58   I just go through, here's all the deposits, here's all the debits.

00:05:03   And that's my books, that's my balance sheet.

00:05:06   And it was so much easier to do that

00:05:08   than when I first started out, it was just something,

00:05:10   I ran through my own personal stuff,

00:05:12   but it was a mess and definitely wanted to avoid that.

00:05:15   So definitely, what I would strongly recommend

00:05:16   is you create a checking account

00:05:18   and probably get a credit card for your business.

00:05:21   Like I said, depending on where you are,

00:05:24   it will depend on how easy it is

00:05:25   to create your own business entity, an LLC, or an S corp,

00:05:29   or all the things that you can do.

00:05:30   I don't really want to get into that.

00:05:31   really up to your own situation and financial planning and things.

00:05:36   But however it is, even if you're just a sole proprietor, if you're just doing your business

00:05:40   on your own as yourself, create separate accounts for your business that lets you manage and

00:05:46   more clearly have visibility into your financial situation.

00:05:51   Second, and this is perhaps just as important, is the importance of keeping good records

00:05:57   for your business.

00:05:58   It's one of those things that your business is, especially from a tax compliance perspective,

00:06:04   but just generally, the level of care you need to do with record keeping is, I feel,

00:06:10   just higher than it would be in your own personal finances.

00:06:12   No one really cares where you had lunch and how much you spent and so on.

00:06:18   But for businesses, and especially for tax compliance reasons, it's very important to

00:06:22   keep track of all your receipts, all your records, have all that in place so that you,

00:06:26   When it comes to your taxes at the end of the year, when you're kind of looking through

00:06:30   things, you have really clear documentation for this.

00:06:34   Certainly it really helps that a lot of things are, you know, I do online now, and so I just,

00:06:39   you know, I have a collection of receipts and things, and for me, like I've said, someone

00:06:44   else does my books for me, and so I just email her all of the receipts whenever I get them,

00:06:48   with a little category, with a one or two word description of what it was, if it isn't

00:06:52   obvious.

00:06:53   And that helps me sort of try to collect all the receipts.

00:06:55   The goal is that for any transaction that the business has, you have a record of exactly

00:06:59   what that is, when it happened, and often who was there, what it was about.

00:07:04   And that really helps with your tax compliance when you're trying to justify a business expense.

00:07:10   The whole concept of a business expense is a funny thing.

00:07:13   I definitely hear a lot of people who have this mindset, "Oh, I want to start a business

00:07:19   because then everything's a business expense," as though somehow that makes everything free.

00:07:24   It certainly helps and the government picks up a portion of a lot of the expenses I incur

00:07:29   as a business, which is great and I appreciate that.

00:07:34   But it's sort of like mortgage interest.

00:07:37   It's not free, that's tax deductible.

00:07:39   It's cheaper.

00:07:41   The way that works out practically is if I make a purchase for something that's business related,

00:07:44   say I purchase a thousand dollars worth of widgets,

00:07:50   the government is essentially going to be paying for a portion of that.

00:07:55   And in the sense of a portion of that's not counted against my taxable income.

00:07:59   And so the government is chipping in part of that.

00:08:03   And so it's better to think about it as a discount.

00:08:07   Essentially everything is whatever, 30% off, 40% off,

00:08:09   depending on what your tax rates are.

00:08:12   But that's how you think about it.

00:08:15   It's a discount.

00:08:16   It's not like the business is buying it so it's free,

00:08:17   or the business is buying it so that you can go crazy.

00:08:17   It's still your money. You're just purchasing that at a discount.

00:08:22   That's just something that a lot of people I hear, you'll get to the end of a year and be like,

00:08:27   "Oh, man, I got this extra money I don't want to have to pay tax on."

00:08:30   And that's perhaps one of the most silliest things you can hear.

00:08:33   It's sort of the old phrase, buying something because it's cheap that you don't need is no deal at all.

00:08:35   Because something's on sale doesn't mean that it's worth buying unless you would have bought it otherwise.

00:08:42   And so that's the other thing you want to keep in mind, is that your business is still your money.

00:08:47   or it's you and your partner's money that you're spending.

00:08:50   And so be mindful of that.

00:08:51   And don't get too carried away of thinking,

00:08:53   oh, it's a business expense.

00:08:54   It's a business expense.

00:08:56   It's still coming out of your pocket to some degree.

00:08:58   And then next, I just want to talk

00:09:00   about budgeting and salary and this type of thing.

00:09:04   So for a while, I used to think I really

00:09:06   needed to be careful about budgeting.

00:09:07   And ultimately, I found that it didn't really

00:09:09   fit with the way I work and the way I think

00:09:12   to have a very detailed budget.

00:09:13   Some people, that works great.

00:09:14   Some people, it doesn't.

00:09:16   You want to find what works well with you.

00:09:18   But the real goal of a budget is to have

00:09:20   a sense of where you are on a cash flow

00:09:23   basis from my perspective.

00:09:26   My goal is to say in a typical month, I spend x.

00:09:31   In a typical month, I make y.

00:09:33   And I'm trying to make sure that those two offset so

00:09:35   that I have a profit and that that profit is going

00:09:37   to be roughly what I can do.

00:09:40   And so budgeting for me, I find, is

00:09:41   most helpful in the sense of helping

00:09:43   to determine if something is worth,

00:09:45   if I can afford to do something.

00:09:47   If I'm thinking about doing an advertising campaign,

00:09:48   or I'm thinking of buying a new device,

00:09:50   I can look at it and say,

00:09:52   how's the business doing compared to

00:09:54   the money I want to make?

00:09:56   And this leads into probably the second,

00:09:58   or I guess now it's up to the third,

00:10:00   key thing that I find,

00:10:01   is as soon as you can,

00:10:03   if you're trying to do a business at all seriously,

00:10:05   if you want this to replace your income,

00:10:06   if you want it to be your main job,

00:10:08   I think it's very, very wise

00:10:10   to start paying yourself a salary from your business.

00:10:13   rather than just sort of doing the somewhat simplistic version of,

00:10:18   you get to the end of the month and you just write yourself a check for whatever is left at the end of the month,

00:10:23   every month or something like that. I used to do that and that was kind of the way I used to do.

00:10:29   I first worked it out when I was a business, but I found that on the personal side,

00:10:33   that was very stressful and challenging to have these massive fluctuations. If I have a good month,

00:10:37   you know, a lot of apps are selling or whatever, you know, maybe it's the Christmas rush and so you get a little burst in sales.

00:10:43   And then you get this nice check, okay great,

00:10:45   we're doing our personal stuff based on that,

00:10:49   and you have a few dry months,

00:10:50   and things get tricky and tight,

00:10:53   and it's more difficult to balance that.

00:10:56   I definitely found that it was a lot less stressful

00:10:58   being independent when I started to just take a salary

00:11:01   from the business and to gradually build up

00:11:04   a buffer in the business to pay me that salary.

00:11:08   And obviously that's still my money in the business,

00:11:10   and I could take it out at any time,

00:11:12   But by leaving it in the business and paying it out to myself in a measured way, it sort

00:11:19   of smooths out all the ups and downs of the business and makes my life much simpler. It

00:11:25   makes things like budgeting much easier on the business side because I know what my expenses,

00:11:29   from a personnel perspective, including my own costs, are going to be every month. And

00:11:33   that's what I'm basing it on.

00:11:35   And then I think what I do is quarterly, I take out any extra profit that's left above

00:11:40   and beyond what I need to operate the business, a reasonable cushion and margin.

00:11:44   I take out quarterly as a bonus, if that makes sense.

00:11:48   But I've just found that to be a tremendously helpful thing for simplifying my expenses

00:11:54   and simplifying the difficulty on a personal side of being self-employed.

00:12:00   As soon as you can do that, I'd highly recommend it.

00:12:03   It's one of those things that certainly takes a little discipline.

00:12:06   And really what you're looking for is you're hoping to find one of those nice bigs, and

00:12:13   capitalize on a big spike in the business.

00:12:16   Most of these businesses that I talk about here, selling apps or doing consulting, are

00:12:20   very bursty.

00:12:21   There tends to be good months and bad months.

00:12:23   And so whenever you get a good month, try and leave something in the business, and leave

00:12:27   something in the business, and leave something in the business every time you have a good

00:12:30   one, and then you'll be taking it out evenly over the course of the year.

00:12:35   And I said that really, really, really helps.

00:12:38   Especially on a personal side with your spouse or family life,

00:12:42   it's sort of like you have a job again.

00:12:44   It's sort of like you just have a regular job

00:12:46   that you're making an income from.

00:12:47   And you can plan accordingly, and you

00:12:48   can work out your mortgage, and you

00:12:50   can do all those things in a way that makes a lot more sense.

00:12:53   For me, I found it was really difficult

00:12:55   if I had one of these big burst months,

00:12:58   or I have a consulting client who finally catches up

00:13:01   on their invoices or something, and I'm

00:13:04   this large influx of money, to treat that as though it

00:13:09   essentially needs to last a couple of months, if it wasn't actually paid to me that way.

00:13:15   So that's kind of how I do it. I'm trying to think of other parts of this that are important to keep in mind.

00:13:20   Probably the last one is just to make sure that you--

00:13:26   and it gets back to what I was saying at the beginning--that if you don't treat your business like a business, no one else will.

00:13:31   will. And what I mean by that is that you have to take your finances very seriously

00:13:36   when you're a business. It's a different level of responsibility. It's a different level

00:13:39   of accountability. And often the amount of money that you're talking about is more than

00:13:45   what you would typically have to deal with if you were a salaried employee. A lot of

00:13:48   the overhead costs, the benefits, expenses, taxes and stuff your employer was paying for

00:13:52   you that you never saw, it's your own company, you're responsible for that. And the classic

00:13:58   example is you're going to be responsible for, you know, sort of payroll taxes and stuff

00:14:03   often, depending on your situation, whatever. But you know, there's often times when you'll

00:14:08   have money in the business that isn't actually yours, that'll ultimately be owed to the government

00:14:12   or ultimately owed to some regulatory body or whatever. And you have to be very careful

00:14:17   as you don't get sloppy about that and take money out that turns out wasn't actually yours.

00:14:22   All right, so that's it for today's show. As always, if you have questions, comments,

00:14:26   concerns or complaints, I'm on Twitter @_davidsmith, I'm on AppNet @davidsmith, and otherwise I

00:14:31   hope you guys have a great weekend, happy coding, and I'll talk to you next week. Bye.