Proper Business Budgeting

Brandy started selling things on eBay, which turned into a small business. Now she isn't sure how to handle the income from this business. Dave explains how to make this work.

QUESTION: Brandy in Illinois became a single parent with a special-needs child several years ago. She started selling things on eBay, which turned into a small business. Now, she’s no longer a single parent, and she isn’t sure how to handle the income from this business. Dave explains how to make this work.

ANSWER: The first thing you have to do is separate the eBay business from your personal accounts. Have a separate checking account—everything from eBay goes into that account and all your expenses for the merchandise comes from that account. What’s left in there is profit.

If you clean out the account and take it all home, and you don’t have the money to pay your business bills, you just shot the goose that’s laying the golden egg. We’ve got to be able to pay the business bills, and that includes buying new inventory and paying for any unpaid inventory that you have outstanding. If you have $2,000 in bills and $5,000 in the account, you can take $3,000 home.

That sounds a little primitive, but that’s basically how business is run. You can make your approach more sophisticated later, but you’ve got to be able to cover your payables, and you’ve got to restock your inventory.

You say you’ve got a $10,000 small business loan and two car loans for $7,000 and $13,000. That sounds like a debt snowball of $7,000, $10,000 and $13,000. Your business debt is business debt only in your mind because you are personally liable for it. It’s not business debt as far as the law looks at it.

I would put that in the debt snowball, bring everything home that you can while still being able to operate the business. Then apply it to your debt snowball in your monthly budget at home. When you have a great month, the household has a great month.

But you’ve got to restock and take care of your payables. Don’t shoot the golden goose. And when you move money out of that eBay account and bring it home, that is when it becomes taxable. So you need to set aside a fourth of that money for taxes. For every $1,000 you pull out, you write a check for $750 for your household and $250 into a separate savings account to pay your taxes because you’re supposed to be paying quarterly estimates on this business.

So you’ve got a separate account, you’ve got a tax withholding plan, you’ve got a plan to cover inventory and restock, and you take the rest of it home and work your debt snowball. The business debt drops down into the home as one of the home debts because that’s the way the law looks at it anyway.