Mastering the Financial Food Pyramid with Shanna Skidmore

Happy Wednesday, boss ladies! Today I am so pleased to share a special guest post by the business savvy Shanna Skidmore of Shanna Skidmore Consulting. With more than eight years of experience in the world of finance + business, Shanna has so graciously offered to lend her expertise to you lovely readers! One of the most common topics that pop up during my business consults with creatives are rooted in finance and budgeting, like proper allocation of funds, budgeting and more. It’s such a delight to delve into this crucial and often mystifying topic with an expert today so grab a cup of your favorite beverage, a notepad for scribbling down notes and let’s hand things over to Shanna! 

Understanding finance can sometimes feel like trying to understand the universe. There is just a lot of dark matter! As a business development consultant for creative entrepreneurs, I understand all too well that financial conversations cause most people to shut down! Honestly, this is a huge reason why I started my company. I strive to bring clarity to a subject that often feels scary; yet implementing simple steps can dramatically change the trajectory of a business!

I have spent the last eight years working with small business owners in the area of finance and accounting. I’ve been able to walk through many questions, scenarios and case studies on best practices and build intentionality into each client’s financial plans!

Today I want to share with you a guide on “where to put your money”… A financial food pyramid of sorts!

Let me preference this discussion with this disclaimer: Did you know the food pyramid no longer exists? The US government has replaced the food pyramid with “my plate”. That is like saying Pluto isn’t a planet?! Oh wait… my world has been rocked! The truth is as we continue to learn more about science, health, and technology, new information can outdate the old. It is no different with finance. Unfortunately, there just isn’t such a thing as a financial “food” pyramid. Finance is a tricky beast that differs based on every situation. It is pretty much impossible to give general rules that apply to everyone. With that said, I am going to share a starting point to this discussion which will hopefully bring a little more clarity to your business finances. However, I cannot stress enough the importance of a great professional team (tax accountant, attorney and financial advisor) to create plans that work for you and your unique situation!

First things first – the ENTIRE pyramid represents all SALES revenue; 100% of every dollar your company brings in this year.

Now let’s piece it together!

1. Typically the largest percentage of sales dollars are going to go straight back out the door as PRODUCT COST. I suggest no more than 40% of all sales dollars to be spent on PRODUCT COST. This includes materials, shipping, packaging, labor, client gifts, client meals + entertainment. Let me say again, this is a rule of thumb! If you provide a service-based product or if you manufacture goods this will look different.

Real World Example: If I sell $100 of goods, I want to spend NO MORE THAN $40 to create those goods!

2. Next we have to cover OVERHEAD COST. Overhead includes general expenses related to running your business. These aren’t costs that are specific to creating your product but instead are GENERAL day to day expenses such as: rent, utilities, office supplies, telephone, and employee wages. You want OVERHEAD COST to stay below 30% of overall sales.

Real World Example: If I sell $100 in goods, $40 goes to create the goods (PRODUCT COST), and $30 goes to run the company (OVERHEAD COST)

Now that you have taken care of PRODUCT and OVERHEAD COST, it’s time to pay yourself, save for taxes + save for a rainy day!
The remaining 30% can be broken down as:
18% to pay OWNER!
9% to pay income TAX!
3% to business SAVINGS!

Real world Example: If I sell $100 in goods, $40 is spent to create the goods (PRODUCT COST), $30 is spent on general day to day expenses (OVERHEAD COST), $18 is paid to owner, $9 is saved for income tax, the remaining $3 is saved for future business purposes.

There are a lot of things we haven’t covered in this example: such as sales tax, owner paychecks, types of business licensing, and payroll. All these circumstances change how and where business sales revenue is spent. However, don’t get bogged down in the details! If you focus on keeping PRODUCT COST under 40% and OVERHEAD COST under 30%, let your team of professionals (tax accountant, attorney and financial advisor) advise you on the rest. We are not called to be experts in everything!

I hope this tool is helpful as you start planning you business sales goals + budgets for next year! If you want more tools on planning your finances and building a successful 2015, I’d love for you to join me at my annual planning retreat for Creative Businesswomen – BLUEPRINT RETREAT! Registration ends December 31st! Visit my website for more information!

Keep Dreaming Big Dreams!

Be sure to follow along with Shanna on her blog and Instagram for more business savvy advice + updates. Thanks for sharing your insight with us, Shanna! xo

Photo courtesy of Morgan Blake Photography for Shanna Skidmore.