An operating budget is essentially the financial buffer you maintain in your business account to help manage unexpected situations and maintain smooth operations. There are various methods to prepare a budget, depending on your business’s needs and financial philosophy.

One popular method is the Rainy Day Fund. Here’s how it works: calculate all your fixed and variable expenses, and decide on an amount that will cover your costs for a set period. For example, consider your office expenses, insurance, subscriptions, and average marketing and contractor payments. Add a payroll cushion to cover the owner's compensation and employee payroll for a few months, enhancing financial security.

Example Breakdown:

To ensure a solid cushion, you might decide to keep about $20,000 in your business account as an operating budget.

Anything above this buffer can be transferred to your personal account as a "Shareholder Distribution." Remember to save a portion for federal and state taxes.

Another approach is to retain revenue equivalent to a couple of months’ worth of expenses to ensure you never dip into a negative basis, which could lead to capital gains taxation. This method aligns well with your Shareholder Basis—the amount you get taxed on, which increases with income and decreases with expenditures.

While many accountants adhere to traditional bookkeeping practices under Generally Accepted Accounting Principles (GAAP), alternative methodologies like the one proposed in Mike Michalowicz’s book, Profit First, can also be effective. This method, which advocates for distributing income into seven different bank accounts (including revenue, profit, owner's comp, tax, expenses, and additional holding accounts for profit and tax), can help keep your business lean and prioritize profit.

Using multiple accounts does increase bookkeeping complexity. Choosing the right budgeting strategy depends on your business model, cash flow needs, and financial management preferences. Whether you prefer a conservative approach with a Rainy Day Fund or a structured method like Profit First, the key is to ensure it aligns with your overall business goals and compliance requirements.

For any further guidance or if you have questions about setting up your business budget, feel free to reach out to [email protected].

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.