50/30/20 Rule for Small Businesses: Can It Work for You in Creating a Budget?

Creating a budget is essential for maintaining financial health and sustainability. It helps you track your spending, avoid overspending, and ensure that your savings goals get the attention they need in a clearly defined way. The 50/30/20 rule is a popular personal finance tool and budgeting method that helps individuals allocate their funds each month to meet financial goals, no matter what they earn or how much they spend.

Many small business owners also struggle with balancing expenses and planning for growth, especially when there are variable expenses and revenues at play. So, while the 50/30/20 rule can be a great monthly budget strategy for individuals, could it also serve as a budget template for your small business? Let’s take a look at the best way to create a budget.

What is the 50/30/20 Rule?

Usually utilized in personal finance management, the 50/30/20 rule is a straightforward and easy-to-understand budgeting method. It creates a budget by allocating 50% of your monthly funds to needs, 30% to wants or discretionary expenses, and 20% to savings (and debt repayment).

The simplicity of the 50/30/20 rule is probably the reason for its effectiveness and popularity. Rather than going through your expenses line by line and setting budgets for various spending categories, this rule just puts each of your expenditures in a bucket: Need, Want, or Save. It then splits up your monthly income to cover those buckets, so you know how much you have for each category every single month.

The 50/30/20 rule helps create a balanced approach to managing financial obligations. Not only are your short-term needs and living expenses covered, but there is also an emphasis on wants and future planning. No matter your financial situation, you can save money and work toward long-term goals, like getting out of debt or covering a big purchase, without added mental effort.

Can the 50/30/20 Rule Apply to Small Business Budgeting?

Just because a particular budgeting method works for personal financial planning doesn’t automatically mean it will also work in a small business setting However, if you find that your business is running out of money by the end of the month, your financial priorities aren’t being met, or your business savings account isn’t growing, it might be time to consider creating a budget with the 50/30/20 method Knowing just how to create a budget for a business can involve some finessing.

Adapting the 50/30/20 rule for business

A business can have needs and wants — just like a personal budget would — but the financial decisions are usually a bit more nuanced. It’s important to adapt the 50/30/20 rule a bit to meet your business’s monthly expenses and both short- and long-term needs.

50% for essential business expenses

In a personal 50/30/20 budget, the bulk (50%) of your after-tax income would go toward Needs. This would include necessities like the roof over your head (mortgage payments, rent, utilities, insurance, etc.), groceries, child care expenses, and minimum payments on debt (personal loans, student loans, etc.).

Similarly, you might opt to put 50% of your business’s net income toward essential expenses for the company. This could include things like:

• Rent or commercial mortgage payments
• Utilities
• Payroll
• Insurance premiums (car insurance, umbrella or liability coverage, healthcare, property insurance, etc.)
• Necessary software
• Equipment and maintenance
• Debt payments (loans, credit card payments, car payments, etc.)

If it’s a core expense that keeps your business running from day to day, it probably belongs in this bucket.

30% for growth and expansion

In a personal budget, 30% of your take-home pay would go toward Wants. This might include the cost of eating out each month, making extra payments toward your credit card debt, shopping, Netflix subscriptions, and other discretionary spending.

In the business version of 50/30/20, these funds are directed toward growth and expansion instead. If it helps drive future revenue, it goes into this bucket. This might include:

• Marketing costs
• Product testing and development
• Staff training
• Client acquisition

20% for savings, emergency funds, and debt management

The remaining 20% in your personal or business 50/30/20 budget goes toward preparing and saving for the future.

By setting funds aside in a dedicated bank account, you can build a savings cushion for unforeseen expenses that could arise down the line or big plans you may have for the company. You could also use this cash to pay down a little extra on your business debt and improve your long-term financial health.

Advantages of the 50/30/20 Rule for Small Businesses

While the 50/30/20 rule doesn’t work for all business owners, it can be a great alternative to other budgeting methods such as the zero-based budget. That’s because it:

• Is simple and easy to implement. Rather than chasing down expenses, managing multiple categories, or updating a complex budget spreadsheet in Excel, 50/30/20 just means allocating a percentage of whatever funds you earn toward specific buckets.
• Helps improve cash flow management. With 50/30/20, Needs are always the priority. This ensures that essential expenses stay prioritized and creates a stable financial foundation for your company.
• Encourages financial discipline. Rather than hoping you have cash left over each month to put toward savings or future goals, practicing a 50/30/20 budget forces you to allocate a specific percentage toward your plans. Emergency savings, future purchases, debt repayment... however you spend the 20%, it’s going toward making your business stronger.

That said, creating a budget with this rule also allows room for customization. Based on your specific business needs, you can adjust this budget’s framework — even temporarily — as your company grows or faces challenges.

Challenges and Considerations

You may find that the 50/30/20 budget isn’t perfect, in either a personal or business respect. In fact, it can have challenges of its own.

Not all business expenses fit neatly into a category

While savings goals are relatively easy to identify, some expenses are difficult to classify as either "needs" or "wants." For example, marketing your business feels like something you need to do if you want to remain competitive and even grow, but is it absolutely necessary for the monthly basic function of your company? Probably not. Categorizing expenses can be more art than science in some instances.

Changes often have to be made

You may have fluctuating costs that require adjusting your budget over time and pulling from other buckets. For example, if you have a variable-rate loan and interest rates increase after a certain date, you might need to allocate cash from savings to cover the increased payments. Or if you don’t have enough stashed in emergency savings and encounter a massive expense, you might need to pull from Wants.

In some cases, you may simply have a business that operates on a narrow margin. In this case, you might decide that 50% for Needs isn’t enough and that creating a budget with a 60/20/20 or 70/15/15 rule actually works better.

You need to understand your starting point

Before putting funds in each 50/30/20 bucket, know what sort of cash your business is working with. It’s a bit more complex than just looking at personal pay stubs. Instead, you need to work to establish a clear picture of your business’s monthly or quarterly revenue when creating a budget, as well as fixed and variable costs when setting aside funds for each category.

Flexibility is key

While 50/30/20 is a budgeting rule, it truly needs to be adapted to the specific financial needs, and realities, of each business.

You might need to adjust your percentages a bit to account for the type of business you own or the industry that you’re in. You may operate on a very narrow margin for part of the year, for instance, and can’t afford to put 20% into savings every single month. In this case, create a budget that allows for higher Needs than Wants.

You can also shift your percentages to account for your business’s current stage of growth. If you’re making a big push toward expansion or even acquiring another company, you might need to pull from savings and temporarily allocate less than 20%.

Adjust regularly

As with your personal budget, you may need to revisit your worksheet and make changes over time. Depending on business revenue and expenses, seasonal fluctuations, growth stages, market changes, or even changes to your company goals, plan to go back to your numbers and check in regularly to see if they need adjusting.

A budgeting app can be helpful

Keeping good financial records is necessary for your business, and some budgeting and tracking tools can help you create a budget, set rules, allocate funds, and track your progress.

Accounting tools like QuickBooks, Monarch, and Zero can track your company’s spending and cash flow, so you’ll always see whether you’re within budget. These can categorize spending and provide you with on-the-spot insights into your company’s financial health.

Final Thoughts

A well-managed budget is crucial to your long-term success, both at home and in your business. Implementing a framework like the 50/30/20 rule can help small business owners track expenses, allocate funds, and stay on track toward financial goals. The 50/30/20 rule can be flexible and allows you to make adjustments as needed but can be a great framework and starting point.

FAQs on Creating a Budget for Your Business

Does my business need a budget?

A budget is beneficial for any business, helping you manage the money you earn, track spending, identify areas where you could cut back, and save for future goals. No matter which budget method, app, or software you use, creating a budget for your business is a smart move.

Where should I put my business cash when using a 50/30/20 budget?

Running a business involves multiple accounts, such as a business checking account for everyday transactional funds and a business savings account for short- and long-term savings. Just make sure that your accounts are opened through a member FDIC financial institution for peace of mind. You may also want to put your savings or investment funds in a money market account (MMA), certificate of deposit (CD), or individual retirement account (IRA), depending on your plans.

Should I pull from savings if my business expenses are too high in one month?

With the 50/30/20 rule, you can make adjustments to cover higher operating expenses or even cover unexpected expenses. Ideally, the 20% Save portion will help you save up enough to cover emergency expenses and unplanned costs in the future, so you won’t need to touch the other two categories.

What is the golden rule of budgeting?

The golden rule of budgets is that you should always spend less than you earn. Whether at home or in your business, this simple rule ensures that you always have cash left over at the end of the month, which you can direct toward savings or future goals.

How much should my business budget for savings?

If following the 50/30/20 budget, you should try to allocate 20% of your business revenue toward savings and future business goals. However, you may need to adjust this number according to your business expenses, cash flow, seasonal changes, and even the phase of growth your business is in at any given time.

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