Profit Coaching QOTD: Is Your CFO Services Provider Using the 90/10 Rule?

| June 19, 2014 | By

What Is the 90/10 Rule?

Under the 90/10 rule, you only operate on 90 percent of your company's monthly income. This way, you have the opportunity to save the other 10 percent in a separate account for taxes, extra debt payments, and working capital.

This sounds simple, but the reality is that it rarely happens in the business world. Instead, many businesses operate on their full billings. Have you ever struggled to make payroll? This might sound familiar.

The 90/10 Rule in Practice

Wondering how the 90/10 rule really works? Grab a piece of paper and start writing, beginning with what your company bills on average each month. Some months may be better than others, so an average is fine.

Let's pretend your company bills $100,000 a month in revenue. Take out 10 percent for taxes, debt payments, and rainy-day savings. In this case, you would set aside $10,000.

This means you have $90,000 left to accommodate operational decisions. This might include paying for several things with your budget, such as:

  • Your entire wage for the month

  • Marketing expenses

  • The cost of your materials and supplies

  • All overhead expenses

  • Minimum debt payments

  • All partner payments

  • Any other balance sheet payments or monthly expenses

See how easy that is? Now go back to your worksheet and plug in your actual numbers to get a clear picture of what the 90/10 rule looks like for your business.

Create a Plan

Once you determine the dollar amount you’re working with, sit down with your CFO services partner and strategize. It’s time to create a plan for how the 90 percent will be spent.

Let’s go back to the $100,000 monthly revenue example. With $90,000 of that available to you in your budget, your spending could look a bit like this:

  • $30,000 for labor

  • $25,000 for materials and supplies

  • $10,000 for your month's wage

  • $9,000 for partner payouts

  • $8,000 for marketing

  • $5,500 for overhead

  • $2,500 for minimum debt payments

Now go back to your worksheet and plug in your actual numbers based on average expenses. The main point is that this shouldn’t be complicated. If you keep it simple, everyone can understand it and make better decisions.

➡️  Can you do more than 10 percent?

If you’re already beating the 90/10 rule—great. Pat yourself on the back. But you can—and you should—do more as you scale. Try to improve this ratio so that once you get to 90/10, shoot for 85/15 and so on.

➡️  What should you do with the 10 percent?
The small amount you set aside is intended to be money for later—kind of like when you put money into your personal IRA for retirement. So, keep it in your savings account and forget about it until it’s needed. This will do several things for you:

  • It creates a buffer for when the economy declines.

  • It provides a cash balance to pull from if you end up owing taxes at the end of the year.

  • It gives you options to grow in times of uncertainty, such as by cheaply acquiring competitors during a recession.

If you have debt, you should try to pay it off as quickly as possible. Some CFO services will argue that having debt is a good thing due to the time value of money, but being debt-free sets you up for success.

In our budget example, we set $2,500 aside for minimum payments on debts. But a minimum is just that, and you could do more. Your 10 percent could be used to pay extra toward the balance until you're out of debt—similar to paying more on the principal of your mortgage loan. Once you've done that, the rest goes into savings.

How to Get Started

If you want to roll out a 90/10 model for your business, outsourced CFO services can lay the groundwork. The right partner will help make your goals a reality by helping you put a few tips into practice.

Consider these maintenance tips.
If keeping up with your spending and saving throughout the year seems like a daunting task, it doesn’t have to be. Work with your CFO services partner to develop a strategy to focus on key areas.

✅  Follow a three-month minimum.
Ideally, you would keep adding 10 percent or more to savings every month. Of course, that might not always be feasible. So at a minimum, try to build up savings of three months of expenses. In our example, the business is gobbling up $90,000 every month. That means once you hit $270,000 in savings, you can consider stopping—but keep going if you can.

✅  Invest in marketing appropriately.
Most companies invest 1-2 percent on marketing and would sooner prune marketing before they would let go of staff. If that's the case for your business, consider rearranging your budget so you're investing in marketing and customer acquisition—spending closer to 5-6 percent. Once that’s in line, make cuts in payroll and other places to better achieve that 90/10 split.

Follow these tips to prevent overspending.
If your business is spending more than 90 percent, it's time to make some hard decisions. That usually starts with looking at your staff, followed by building relationships that matter.

✅  Reassess payroll.
Most companies have too many people on staff. While it’s a drag to let people go, you have to be honest with yourself. Start asking critical questions:

  • Do you have people on your team who aren’t pulling their weight?

  • Have you hired family members and don’t want the backlash of letting them go?

If a CFO services firm is profit coaching you and your company, start here.

✅  Build relationships.
Once your team is set up, take the time to optimize your relationships with suppliers to avoid overpaying for materials and supplies. While fostering positive relationships takes longer, it’s worth it in the long run.

Use the 90/10 Rule to Keep Growing

Figuring out how to budget for growth is challenging, but think of it this way: Your business has gotten this far. So don’t let a little balancing act scare you. Use the 90/10 rule to save for future business needs and prioritize the expenses that matter most. You may even find that you’ll eventually be able to save more and spend your allotted budget ever more wisely. Take a deep breath—you’ve got this. In the end, you'll have a business that's profitable and strong!

Need an assist? Enlist the help of an outsourced CFO services partner from Ignite Spot and jump-start your business.

Strategic growth opportunities should be available regardless of your company’s size.