When writing this post about how to handle cake cancelations during a crisis, I mentioned having a savings account for your business. Then I wondered... how many home-based cake businesses are doing this? Maybe not many, so I wanted to share how to build a savings account for your cake business.
For as many years as I've been doing cakes, I've had a separate bank account for my business. I'm a firm believer in good bookkeeping and keeping business finances separate from personal finances, so this was a no-brainer for me.
But how did I build a savings account for my cake business?
When I first started, I'd say by the time I did my 10th cake or so, I opened a separate account with $100 if I remember right. Then I bought my ingredients for my next order from that account.
I didn't mix cake ingredients with the groceries I bought for my family. I had separate receipts - separate accounts.
And when I was paid for my next order (and the orders after that), I put the money back in that account. I did that over and over again. In the beginning, I was only doing 3-4 cakes a month so there weren't a lot of transactions but my growth was slow and steady.
In theory, if you start doing this and you're charging enough money for your cakes, the balance in your account will start to increase.
At the end of the first month, I evaluated how much money was in that account and then chose to pay myself a set amount for my work that month... not a typical salary, but something along those lines.
It was not a lot of money, but it was something. And it was not ALL the money I had leftover after buying ingredients.
You will never get ahead if you consider every extra penny you make "profit"...
So what I did not do was wipe out that account. I left money in there for the next time I had to buy supplies and ingredients. And I left more than the original $100.
By repeating this for several months, the balance continued to grow. Eventually, I opened a savings account and moved some of that reserve money over to savings.
And after several more months, I was not only paying myself a monthly salary, I was also making a monthly deposit into my savings account.
And that is how I built a savings account.
One other quick note - if you don't have enough money to do this, you are not charging enough for your cakes. Period. You should be making a clear profit on cakes - enough to pay yourself and save some for your business. It may not be a lot when you first get started but it has to be some.
Read more about How to Charge for Cakes here.
Why do I need a savings account?
The most obvious answer right now is for times like these - when there's a national emergency due to a pandemic.
If you begin to get cancelations and clients asking for refunds, you will have the ability to offer those refunds and survive those cancelations. Or even if you don't offer refunds, you'll be able to continue to pay yourself a salary when there's no money coming in.
For me, I always strive to have at least 3-6 months of income in my business savings account. That way if business drops off, I can continue to pay myself until things bounce back or I come up with a strategy to make money quickly.
But not just for things like this. What if you get an order bigger than you've ever had? What if you need to order supplies that are out of the ordinary and expensive? Or what if your refrigerator quits and you have to buy one immediately to keep working?
If you have a savings account, you can pay for those things easily from your savings.
You can also use your savings for large purchases, like if your mixer quits (and you want to upgrade to a Bosch 😉) or your oven goes out. When you have a reserve of income set aside, misfortunes like this will not wipe you out or be completely devastating.
A recent example from my business:
I wanted to start teaching local cake decorating classes. For my class model, I decided I'd be providing all the supplies. So I had to spend several hundred dollars ordering cake turntables, frosting tips, bench scrapers, etc. for 25 people.
If I hadn't had a reserve of money available, I could never have afforded to spend all of that out-of-pocket before having a single student signed up and paying for my class.
Another example... most of you know that last year I wrote my first book, Cake Decorating for Beginners. My publisher offered me books in bulk with a discount (to sell to my local community and use for book signings, etc.).
But you know what? Buying 250 books (even at a discount) was still a lot of money. I couldn't have made that purchase without my business savings account.
In summary - you need a savings account. And if you don't have enough money to start one, you're not charging enough for your cakes!
I believe this is necessary for personal and business finances so that when life goes crazy, you don't lose your streams of income and you're prepared for emergencies and disasters.
Want to learn more about how to charge for cakes? Check out this post!
Looking for a way to boost your business? How about selling Paint-Your-Own Cookies? You don't even have to decorate them!! Check out my ebook:
Do you have any questions? Leave me a comment!
Great information for any home business! Business books don't give you a life scenario and what to do or how to do it. This subject is something to be learned by experience.
Thanks for the information.
Thank you for the information and everything else I really am thinking about starting my own baking business with your help and everything but I am also a little scared to because I am collecting disability and my husband is also getting disability so I really don't know what to do
Do you include sales tax on your baked goods?
I do have a sales tax permit and add sales tax onto all orders!