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How to Set Up YNAB to Manage Your Business Finances

A few years after starting YNAB, I started a side hustle. I wanted to see if I could generate some extra income to pay off my mortgage early.

When I started the side hustle, the first thing I did was set up a budget for it. I’ve never run the business without a budget, and it’s hard for me to imagine doing it any other way.  Because of the budget, I know exactly what the business costs me and how much I can safely pay myself.

If you’ve never had a budget for your small business, it might be hard to imagine why you should do it and how it should work. So that’s what we’ll dive into today.

Why Does Your Small Business Need a Budget?

If I had to come up with one word for why you should have a small business budget, it would be: clarity.

Because I track my spending in the budget, I:

  • Know exactly what my monthly expenses are, and set money aside for them so they are covered.
  • Am able to save up for non monthly expenses. I use a few subscriptions to run the site and some of those are paid annually. I am always ready for them.
  • Save for taxes. This one is HUGE. When I report the income each year, I’ve always had more than enough to pay the taxes. There’s no way I could just come up with that money suddenly.
  • Easily deal with unexpected expenses. My side hustle involves running a website and occasionally I run into a bug and have to pay someone to help me. I’ve been able to deal with those occasional hurdles with ease.

Some people that run a business just use a checking account balance for reference, or an app that only tracks spending.

The checking account would just be one number—it wouldn’t tell me how much I had for monthly bills or annual subscriptions. I would be scared to pay myself if that’s all I was looking at, because I’d be constantly unsure of whether or not everything was covered. And let’s face it, we all want to get paid for our work!

Looking at past spending would help, but it wouldn’t help me plan moving forward.

I just can’t imagine running the business without a budget.

Learn how to manage irregular income with our comprehensive guide.

How Do I Set Up a Small Business Budget?

I’m so glad you asked! Let’s walk through it.

Step 1: Create a Business Budget

If you already use YNAB, did you know you can have more than one budget? You totally can!  And you really should for your small business, it just keeps things more organized.

Click on the name of the budget and “New Budget” at the top of the list. Voila! Easy!

A screenshot showing how to set up a business budget in YNAB

If you’re a new budgeter, you can sign up for a free 34-day trial to create your business budget, see how the app works, and decide if it’s right for you (and you don’t even need a credit card to sign up).

Step 2: Establish a Business Checking Account

It’s best to keep your business separate from your household, so get a separate checking account for the business. At my local credit union it’s called a DBA account which stands for “Doing Business As.” Just ask your local bank or credit union, I’m sure they’ll have something for you.

The only exception to the separate budget/separate business account rule is if your side hustle is really, really tiny. If you’re just selling a few scarfs that you made on Etsy, a separate budget and account is probably overkill. In that case you can make a category group in your regular budget and keep things organized there.

If you do have a separate business checking account though—that is a definite sign you need a separate business budget.

Step 3: Add Your Business Checking Account to Your Budget

Now that you have a shiny new business budget, that’s where you’ll add your business checking account. This is going to make things easier and cleaner for tax purposes—trust me—the IRS will appreciate this.

You’ll budget business dollars to the business budget. If you use PayPal or Stripe, those can be added to this budget as well.

A screenshot showing how to navigate to All Accounts in the sidebar of your new budget

Step 4: Create Your Categories

This is going to be different for every single business. My business expenses for a website will be different than someone who is running a landscaping business, or a tutoring service. Just step back and think about the things you spend money on for your business.

But here are some more common categories that you might want to consider:

Create a list of categories for your small business budget.
Create a list of categories for your small business budget.

Step 5: Create Targets for Each Category.

This is THE most powerful step. Once you’ve dialed in your categories, add a target to any category you can. This is key to helping you plan and stay on track.

I personally don’t add one to Owner Distribution, because how much I take depends on how much comes in. The same is true for Stripe or PayPal fees. So you may have a few categories like that where adding a target doesn’t make sense. But for any monthly or non-monthly expense that you know about, definitely add one.

A screenshot showing a target being set for the Subscriptions category

You can learn about targets in this help article, or you can watch Hannah explain them here.

Step 6: Don’t Forget Taxes!

I’m calling out taxes as a separate step because I think they’re that important! You just have to set money aside for them. The hard part is— how much? My answer? I’m not sure. For me, I just take a percentage of each sale and set it aside for taxes. But I’m not selling hundreds of items a day. If I was, that wouldn’t work.

I’d recommend checking with your accountant first. An online calculator can help give you a ballpark figure. If I went that route, I’d probably add another 10% to be on the safe side, but I tend to be fairly risk averse.

Step 7: Budget!

Now that your categories are set, look at the money that you have and start assigning dollars to jobs.

Budget for the known expenses—both monthly and non-monthly costs—first. Make sure the bills are covered and then assign the rest where you see fit.

Step 8: Paying Yourself

This is the fun part! There are two parts to this: what you do at the bank to transfer the money and how you record that in YNAB.

For me, it’s a simple transfer from my business checking to my personal checking. To determine how much I need to transfer, I check my Owner Distribution category.

Pay yourself from a business budget by checking the owner distribution category.

Then I make the transfer at the credit union.

Now recording it:

First, I record an outflow from the business budget and list myself at the payee.

Record an outflow from the business budget to yourself as the payee.

Notice I categorized it to Owner Distribution.

Then I open my household budget and record it as income. This time the payee is the business, since that’s where it came from.

Record your income in your household budget.

And that’s all there is to it! Super simple – nice and clean and organized.

One Final Pro Tip…

If you’re a business owner who sends out invoices and has to wait for and track payment, this is the tip for you.

I do this and I manage this with a tracking account. You can call this account “To Be Paid” or anything that makes sense to you.

When I send out an invoice, I give the customer 30 days to pay it. I add this as a scheduled transaction for the due date.

So if the day payment is due is September 10th, 2021, that would be the date of the scheduled transaction.

If the person pays me before the due date, I change the date to the day the money arrived, move the transaction to checking and add the “ready to assign” category.

If it’s not paid by the due date, it will get entered on the due date and remind me that it’s still outstanding. I usually send a second invoice and reset the date at that point. This way I never miss an invoice and I stay on top of what’s outstanding.

Setting up a budget for your small business is a great way to stay organized and an essential step towards supporting your future growth. For more resources about budgeting as a small business, check out Beginning Balance, a YNAB podcast for small business owners.

Ready to get started with YNAB for your small business? Try it for free for 34-days.

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How to Set Up YNAB to Manage Your Business Finances