Budgeting for Sole Proprietors in Canada
Having a budget is a good way to plan your spending in advance, think about what you need and want to purchase for your business, and ensure there is money remaining for your personal needs — that there is a profit.
As a sole proprietor, you are taxed on the income remaining after your business expenses, and you pay CPP (both employee and employer portions) on this amount as well. Tax will vary depending on the amount of this income. If you would like to do tax planning to figure out an estimate of the tax owing on your income, please get in touch.
I’ll go through how I budget as a sole proprietor, which hopefully should give you some ideas about how to plan for your own business.
I budget for both business and personal income and expenses, as I keep track of both business and personal expenses in the same QuickBooks file — keeping a business bank account completely separate from your personal expenses definitely makes things easier and cheaper, time-wise, for bookkeeping, but I have a good number of expenses which have both a business and personal portion, and not too many expenses for my business, so I like to keep it all together.
Budgeting is definitely easier if you have a previous year’s fully tracked expenses to compare against, so you can know what to expect. I read somewhere that emergency expenses are surprises a lot of the time, but I think with proper planning, there will be fewer surprises — you can budget for it!
Once I have my categories (in this case, from my previous year) set up in QuickBooks Online, then I display my previous years spending, and decide if I want to increase or decrease the amounts for the coming year. Most of my expenses are fairly consistent, but if there’s something new that I’m thinking about purchasing, then I account for that.
With annual amounts, or amounts that will be in lump sum payments every few years, like the purchase of a vehicle (mine is a bike, so I pay upfront) or a computer or cellphone, I tend to budget for them monthly, just so my spending is fairly consistent month to month, and I make sure my cash flow is able to support my spending (I also bill month to month and tend to get paid on time, so this facilitates that assumption).
My income is not guaranteed, but I have a fairly rough idea of what it will be, which allows me to budget to that.
I also plug my finances into the Government of Canada Retirement Calculator to figure out what I should be saving for my desired income in retirement — or at least get an estimate, the disclaimer there is that the figures “should not be used for financial planning” https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html. I don’t budget for this necessarily — my income that’s remaining after I fill in all the other categories is my savings.
Then I fill in all my income and expense figures into the tax software I use, and see what an estimate of my taxes would be — I usually plug this in from the beginning, or at least an estimate, but here I get a more defined figure, and adjust income and expenses accordingly until I am meeting my savings goals with taxes factored in.
I view my budget as a living document — I refer back to it regularly to see if I am meeting my goals, and if there is something I want to purchase that is not in my budget, I adjust other expenses accordingly and see if I can make it work.
There’s a little bit of how I budget … see if there are any tips that work for you as a sole proprietor, and if you have any questions let me know via the contact form top right.
