How to accurately calculate income in your budget

A budget is a powerful planning tool that allows you to make informed decisions about your spending. Yet, it can be confusing trying to figure out what your income is going to be over the next 12 months, especially with seasonal fluctuations and the state of the economy.

In this blog post I’ll be sharing questions that will help you to accurately calculate your budgeted income. If you don’t have a budget yet, then read this blog post first - 6 steps to easily create your business budget.

Historical information

The first step is to look at your historical information.

What happened in the last 12 months with your business income? Was it as expected or were there fluctuations? How did that year compare to prior years? Has your income been the same, steadily increasing, or were there dips?

Did any unusual circumstances occur? Were you or any team members off sick for an extended period? Did you take a longer holiday than usual? Did you have reduced staffing for any reason?

Taking the time to answer these questions will give you a solid understanding of your past income.

Current situation

The next step is to look at your situation right now.

What do you expect your earning capacity to be?

Consider how many income earning hours you’ll have and how many admin hours you’ll need to manage your emails, marketing, BAS returns, bookkeeping, etc.

Be sure to consider any external factors, e.g. are you responsible for getting your kids to and from school? Will your partner be away for work, so you’ll need to factor in more responsibility at home during that time? How long do you want to take for holidays?

If you have team members, you’ll need to calculate what you expect their earning capacity to be. Are they directly involved in earning income for your business or are they solely admin focused?

Once you’ve worked out what your earning capacity is, you can then break it down further.

How many hours will you have available for 1:1 client calls and/or for any group programs or course that you run?

Do you need to allocate any time to leveraged earning capacity? This would include any passive income streams, e.g. creating a new DIY course.

Here is a worked example for you:

Barbra is a money mindset coach. She works from 9am to 5pm, Monday to Friday.

To work out her earning capacity she starts with a total of 40 hours (8 hours per day).

She always takes an hour for lunch, so she allocates 5 hours to that which leaves her with 35 hours.

She then estimates that her admin tasks take up 2 hours a day, 10 hours across the week, including time spent switching between tasks. That leaves her with 25 hours.

Although she could squeeze in 5 client calls a day, she knows that would be too much of a drain on her mental energy capacity. She also wants to consider that she reads client notes before each call and wants time to update her notes after each call. So, for each client call of one hour, she allocates half an hour for notes and breaks.

25 hours divided by 90-minute sessions means she could have a maximum of 16 sessions a week. She decides that 3 calls a day will be her maximum, a total of 15 calls across the week.

Her current rate is $150 per hour. $150 * 15 = $2250 each week. That would work out as $117,000 (before tax) per year if she worked every single week and had enough clients to fill those spaces.

The future

The final step is to consider what the future holds.

Do you plan on growing your business this year? Are you having any special launches, increasing your prices, or hiring a new team member to increase earning capacity?

Will there be any reduction in your earning capacity in the coming year? An extended holiday or reducing your hours so you can volunteer every Friday?

Coming back to Barabra, she knows that she wants to take 6 weeks holidays next year. She also factors in a week of sick leave, just in case.

52 weeks – 7 weeks = 45 weeks of earning capacity. Multiplying that number of weeks by her maximum weekly earnings of $2250, gives her $101,250 (before tax).

What kind of income goal is right for you?

Which method of goal setting works for you? Do you feel better with a stretch goal or is that demotivating?

Do you want to dream big next year, or is your aim to cover your business and personal expenses?

One method of goal setting is the Good, Better, Best model. This gives you a range of income earning capacity for your business.

The amount you set for each level is up to you. An example could be:

Good – this amount of income will cover all your business and personal expenses.

Better - this amount of income will cover your business and personal expenses AND allow you to add an extra $5000 into your Superannuation.

Best - this amount of income will cover your business and personal expenses, allow you to add an extra $5000 into your Superannuation AND mean you can go to two business conferences.

I always recommend being realistic when setting your income goals, especially if you're new to business, or if there are external factors that you have no control over, e.g. the state of economy.

Accurately calculating your budgeted income can be easier to work out than you might think when you take a methodical approach and consider all of the factors I outlined above.

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