What I Learnt about Managing Finances as a Micropreneur
I’ve worked as a micropreneur for many years: first, as a solopreneur, trying to build and sell an app to make a living. I ran my startup Futurecam. I ran a services company, with employees. I now work as a CTO-level consultant, and I’ve hired a subcontractor for a client project, not to mention agencies to (say) build my site.
In all these cases, I was the person funding it. I did not have investors or a cofounder. So I ended up managing finances, and I wanted to share some tips:
Understand your monthly expenses, be it personal, including your rent (including maintenance), utilities (electricity, gas, Internet, mobile), insurance (life and medical), transport (vehicle insurance, fuel and servicing, Ola), medical (medicines, doctors, hospitalisation (if any)), hardware like a laptop, software and online services (whether one-time or a subscription), fees for professionals you hire (CA, financial advisor, tennis coach), fees for menial workers (maid, car wash guy, dhobi), and entertainment (restaurants, cafes, Swiggy, Spotify, Youtube Premium).
If some of these expenses are annual (like insurance), divide by 12 and consider that your monthly expense. But don’t forget them just because you didn’t incur them last month.
Include one-time expenses, like hiring an agency to redo your website. People often ignore these expenses thinking they won’t occur next year, but a different one-time expense arises next year, say buying a laptop. They ignore that, too. This results in undercounting expenses. Instead, count all expenses incurred in the last year. Do this even if you intend to discontinue the service. Sometimes, we end up not discontinuing it, or choosing an alternative, which has its own cost. If you do discontinue it, it will be reflected when you redo your calculation next year. For now, track your actual expenses, not your intended expenses.
Include business expenses like a sales coach, a course you buy to upskill yourself, audiobooks, business services like Calendly, website hosting (like Wix), blog hosting (like Medium), your domain…
Go through your bank statements for the last calendar month, enter each expense in a spreadsheet, and total them up to determine your total monthly expenses. Repeat this calculation every month, which is accurate. Or, if your expenses are stable month to month, you can assume the same total for subsequent months1.
However you do it, you should know your expenses month to month. If you’re asked what your expenses last month were, you should be able to immediately give a precise answer like “₹87,000” not “maybe 1 lakh”.
Do the same for your income. If you’re asked what your income last month were, you should be able to immediately give a precise answer.
Don’t count money that hasn’t reached your bank account as income, even if you have a contract and have invoiced them. They may go bust, dispute the invoice, or delay payment by months. Don’t count your chickens before they hatch. If you invoice them 2 lakh and they dispute it and pay only 1 lakh, your income was only 1 lakh. The opposite scenario can also occur: you’re paid an advance, and it’s sitting in your bank account, but unless you’ve done the work corresponding to the fee, don’t count it as income. For example, if you’re paid 3 lakh in Jan for a project that starts in Feb, your income for Jan is 0. And if you do 1.5 lakh worth work in Feb and another 1.5 in March, your income for each of these months is 1.5. To summarise, income is only when the money is in your bank account and you’ve done the work corresponding to that fee. Don’t count your chickens until they hatch.
Don’t count money paid as income if the customer is still entitled to a refund, even if that money has reached your bank account. For example, if you charge hourly, and customers are entitled to a refund of unused money, and in Jan, they transferred ₹3 lakh to your bank account and you did work for ₹2 lakh, then your income for Jan was 2 lakh, not 3. The remaining is their money they’ve temporarily parked in your account, and you’ll give it back if they ask. As a second example, I signed an agreement with a lead in April where they’re entitled to a full refund2 if they ask before July 1. Till July 2, I didn’t record this income in my spreadsheet, because there was a chance I’d have to return it.
Subtract income tax when counting income. Gross income is only notional — you can’t spend it. So tracking it is unhelpful — it’s a vanity metric, and fools you into thinking you earned more than you did.
Multiply your bank credits by .688 to calculate that as your net income. In other words, if 1 lakh rupees were credited to your bank account, record your income as ₹68,800. This assumes a 30% tax rate and 4% health and education cess, for a total tax rate of 31.2% (30 * 1.04). This is not accurate, but calculating tax accurately is too complex to do in a spreadsheet to track your finances, so err on the side of under- rather than over-estimating your income. In other words, you want to have a pleasant surprise later, not an unpleasant one.
Some taxes, like professional tax, are not calculated as a percentage of your income. They’re fixed, at ₹209/month3. Consider that ₹209 as an expense, and record it along with your other expenses.
When you subtract your income from expenses, you should know the savings for every month. This number increases cumulatively every month where you earned more than you spent. If your savings at the end of Jan are 2 lakh, and in Feb, you earned 1.5 lakh and spent 0.5 lakh, then your savings at the end of Feb are 3 lakh.
Don’t include your savings from before you became a micropreneur, like your days as an employee. Treat your stint as a micropreneur as a separate business, and it has to break even on its own terms, not drain your personal savings.
Based on this, calculate your runway, which is just the savings at the end of the last month divided by your monthly expenses. If your monthly expenses are 1 lakh, and your savings are 3 lakh, that means your runway is 3 months. Your runway is if your business is running in a loss. This one number — runway — is the most important metric for your business’s health4.
If it’s been more than a year since you estimated, inflate the expenses by 14% per year. But if it has been multiple years, it’s better to redo the calculation instead of using the 14% guideline.
Even the fee corresponding to work I did.
In Karnataka.
If this number is too negative, that means you need to do something different.