While working a 9 to 5 has its benefits, structure and little to no business expenses, you can only make so much money and have the freedom everyone desires when you work for the “man.” Everyone that wants to be an entrepreneur seeks freedom and unlimited income, but what many Life Insurance agents, Real Estate agents, and Serial Entrepreneurs forget is that they have just started a business. If you don’t run your business like a business, then you will be out of business before you can reach your income and freedom goals.
Financial Segmentation
The first key to running a business like a business is to separate your finances.
You have to create a separate checking and savings account just for your business. Now it doesn’t necessarily need to be a business account, but it needs to be separate from your personal checking and savings account.
You need to have all of your commissions coming directly into your business checking account along with all of your business expenses coming out of that same account. Business expenses include leads, office supplies, marketing costs, etc.
You never want to co-mingle your funds. This will make tax time even more heinous and you don’t ever want to think about an audit, but you should always plan for one. Having your funds only enter and exit through your business account is not only makes good financial sense but is required during tax time in many cases.
Speaking of Planning Ahead and Taxes
When you’re new to 1099 sales, getting that $1000 commission check is always great, but don’t run out and buy a new car or TV. When you were working as a W2 employee, tax withholdings were taken care of for you by your employer. Now you’re responsible for taking care of that.
Maybe you were wondering why you set up a business savings account. You need to transfer a certain percentage of every commission made directly into your business savings account. Now get with a certified tax expert to see how much you should hold back from each sale, but 20-30% is always wise.
Business owners, and that’s what you now are, have to pay their taxes quarterly. So if you don’t plan ahead, you will fail.
Many salespeople, like insurance agents, receive advance commissions and are subject to chargebacks from cancellations. If you know that 10-15% of your business is going to fall off, then putting aside 10-15% of your commissions will be enough to cover those chargeback cancellations. Insurance agents should always use best practices when writing up policies.
I can tell you from experience, independent sales reps that don’t plan for cancellations will be working a 9-5 in the not too distant future.
Also, make sure that you are tracking your mileage. This is a huge business deduction for self-employed individuals. Keep track of all your business expenses and get a good accountant, not one that you find in a strip mall. If you gross $100,000 and spend $25,000 on business expenses, for example, you will only be taxed on $75,000. So keep track of everything!
How do I get paid?!
So you may be asking yourself about your weekly paycheck. Once a week you will want to pay yourself from your business checking account. Get with your tax professional, but I have always just transferred a set amount into my personal account each week. But depending on how your company is set up, you may need to pay yourself through payroll.
How much should you pay yourself? That’s a good question. In the beginning, I would recommend you pay yourself the minimum. Only enough to pay the bills. When you’re starting out, your expenses will be high. You’re still learning, so you may not be making as many sales as you will in the future and it’s always possible that you could have your 10-15% cancellations hit you in the first few months.
You may only lose 10-15% of your sales for the year, but if that 10-15% happens in the first month or two, it will feel like 50-75%. Always plan ahead.
So pick an amount that is enough to pay for your monthly expenses, no more. Once you’re thriving, you can live like a king, but for now, you need to live like a pauper.
Once you have $5000 saved up in your business checking account, give yourself a raise. Once you have $10,000 saved up, give yourself another raise.
At this point, depending on your business expenses each month, you can start living comfortably and increasing your weekly income or, better yet, you can start investing more money into leads and marketing expenses and start to scale up your income even further.
Paradigm Shift
You have to change your way of thinking. You have to plan ahead. There’s a new boss in town. This boss comes with the best and worst character traits, disciplines and drive that you have. Because, of course, you are the boss now. You own your own business. If you run your business like a business, you will be in business for many years to come.