The Quick Guide to - MEC

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T T h h e e Q Q u u i i c c k k G G u u i i d d e e t t o o

S S m m a a l l l l B B u u s s i i n n e e s s s s B B u u d d g g e e t t i i n n g g

Your Small Business Life Line

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First Printing: June 2007 Perfect Bound

Printed in the United States

ISBN 13 978-0-9746093-8-6 ISBN 9 0-9746093-8-2 Author: Julie A. Aydlott, CFE

Published by: San Diego Business Accounting Solutions a “Non” CPA Firm

P.O. Box 1128 Lakeside, CA 92040

Printed in the United States

The contents of this book reflect the author’s views acquired through her experience in the field under discussion. The author makes no representation or warranties with respect to the accuracy or completeness of the contents of this book and specifically shall in no event be liable for any loss of profit or any other damages including but not limited to special, incidental, consequential or other damages.

Some excerpts from this book are pulled from the original publication of “The Quick Guide to Small Business Budgeting.”

www.businessbudgetinghelp.com

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Dedication

To the love of my life who has supported me through every new project I have ever started…. Without your animation, humor and life experiences, these books would not hold so much entertainment value and so many real

world applications. Thank you for being my everything. I am the luckiest woman in the world.

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Introduction

Small business owners and entrepreneurs taking the leap of faith and risk to enter into self-employment generally do not have the budget to hire a high-dollar professional to create a business plan. Not only does your business plan include marketing strategies, but most importantly—and often overlooked—it is your ability to survive over the long haul. The Quick Guide to Small Business Budgeting 2^nd Edition was created to help the small business owner who doesn’t quite understand accounting to create and understand their business budget in a language that they can relate to. Using the software already installed on your computer along with the CD including already-created spreadsheets, this book will take you through step-by-step instructions with templates so that you are not lost in the process. The files that come with this book are re-created assumptions for my favorite small business character, Joe Standard. In this 2^nd Edition, Joe needs to understand how to create a personal financial statement. I have created a new template using Excel® that will guide you through the easy process of finally knowing what personal assets and liabilities you have, where your assets are, and how much you are ultimately worth. By the end of this book, you will now know what it costs you to operate on a daily, weekly and monthly basis. You will have a general estimation of your annual personal income taxes, and will finally have a current personal financial statement. This book will not only help the entrepreneur and business owner, but will highly benefit any small business personnel to plan on their company’s current cash flow issues.

This small business budgeting book is not your typical instruction guide.

Instead of creating lengthy descriptions throwing around words that you

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will rarely use, if ever, I do my best to teach the end user the most basic real world steps possible. With that in mind, I try to remove any of the confusing language that most small business owners, entrepreneurs and self-trained office personal don’t understand. When I hear you ask me how to create a budget and a cash flow projection you can understand, that is my biggest focus. My instruction books written for the standard Joe are not written for the highly educated scholar. My down-to-earth, candid yet entertaining approach to one of the most-voted boring subjects around hopefully will provide you with a better understanding and appreciation for money and finances. When your light bulb goes off and you say, “I finally get it,” then I have accomplished my job.

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Microsoft Excel®Personal Budget Attached File Microsoft Excel®Business Budget Attached File Microsoft Excel® Cash Flow Forecast Attached File Microsoft Excel® Work in Progress Attached File Microsoft Excel® Weekly Cash Flow Forecast Attached File Microsoft Excel® Personal Financial Statement Attached File

Digital books not purchased through Payloadz can receive a link to download these files by e-mail request to jasdbas@cox.net

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Chapter 1

Where to begin

You will first need to begin by evaluating your current financial position.

Do you already have a small business up and running, or are you toying around with the idea of opening your own business but don’t know what to do or where to start? Either way, the first important step is to understand why it is so important to create a personal budget, business budget, cash flow projection and personal financial statement. These completed spreadsheets will give you your current financial position.

To better explain the difference between these terms, a budget is a breakdown of your expected monthly expenses. It is something that should stay consistent if you stay within your goal. Creating a business budget has two different aspects. If you are the sole proprietor, not only do you need to know what your business income and expenses are that consistently stay the same, you need to know what your personal expenses are as well. If you forget one major part of your budget, it could throw everything off. Without both of these budgets together, you will not have a true picture of your business and personal cash needs. The reason why this is so important for a small business is because we tend to stretch the

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or business expenses you will inevitably end up with a constant cash flow problem. If you are budgeting for your employer, an already existing business with income, the owner will most likely have their personal budget in order or will not want you to know that much about their personal life.

A cash flow projection is an educated guess or wishful thinking on what you expect your business will do over the next three to five years. General cash flow projections are planned out for a three-year period. That will be the common time frame that a bank would ask for if you are trying to get financial funding. Your cash flow projection is suppose to give you a general idea of how much you will earn, pay out to vendors and employees, and keep as profit at the end of a given year. Thus calling for a forecast.

Just like with the weather, could be right, could be wrong, but it gives you something to look forward to and work at. A cash flow projection is a great tool to set business and personal goals with. If used consistently, you will be able to track your progress to see how you are doing in comparison with what your wishful thinking was.

Your personal financial statement is a detailed listing that shows what your personal assets and liabilities are. Your assets include everything

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from cash, investments, real estate to household assets. They are not only the items that you purchase, but they are the cash value of all of your liquid assets such as excess cash deposited into a savings account or a safe.

Your liabilities will reflect the amount that you owe on those assets. They are the note payments on real estate and vehicles, your annual property tax payments on the real estate, your personal income tax liability, as well as any other debt from credit cards, a lawsuit and co-signing of a loan.

Your estimated taxes are generally what you hire a CPA, tax preparer or accountant to figure out for you. But let’s get real here. When you are a new small business, it really hurts the budget and pocket book to hire in high-dollar professionals right away. Now trying to teach someone how to estimate their taxes is not only like getting a root canal, I always end up being the bad guy (girl). I’ll take it in the chin though because regardless of whether I tell you, or you find out at the end of the year when you didn’t plan ahead, at least you will know in advance what you need to look out for. Estimating your taxes is like creating a cash flow projection. You are guessing at what you believe your net profit (money you have left over after all is said and done) at the end of the year will be. Based on that net profit, Uncle Sam wants his share of the pie. That pie needs to be divided into four big pieces. Those pieces are your 1^st Quarter, 2^nd Quarter, 3^rd

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Quarter and 4^th Quarter estimated tax liability payments. They are your Federal Withholding, Social Security and Medicare and State Income Tax liability paid in advance on what you think you might earn in a given year.

If budgeted correctly, your estimated taxes can be just another systematic bill that needs to be paid. It only hurts worse when you procrastinate and don’t pay it when it’s due.

The following items will be an important part of setting up your budgets, cash flow projection, personal financial statement and estimated taxes.

You will need Microsoft Excel® or Microsoft Works®. These are spreadsheet programs within your computer’s program files. Microsoft Excel® is a more expensive program that you normally need to purchase in addition to what your computer already had installed when you bought it, but sometimes you might get lucky and have it already included as the

“package” deal when purchasing your computer. If you do not have Microsoft Excel®, your computer was most likely supplied with the lower end version of Excel®, which is Works®. Works® does not have all of the fancy bells and whistles, but still “works” just fine. Chapter 2 will explain how to open your spreadsheets supplied with this book using either Microsoft Excel® or Microsoft Works®.

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Please gather all of your information and have it in a handy place. Put it in order by relevance.

9 Personal Budget:

¾ Your checkbook register: It will show you your consistent checks written out each month. It is a great place to find out who your expenses are paid to. If you have a bad habit of over-excessive ATM purchases, make sure you have a general idea of how much it is. Go back four months in your checkbook register and add each month’s ATM charges together. Then divide that total by the four months, giving you an average of what you spend per month on miscellaneous junk.

¾ Your bank statements: If you didn’t actually write down all of those ATM withdrawals, your bank statement will provide an accurate detailing of what you do each month. It will also show you any automatic payments that come out of your account to pay selected bills. Don’t forget those nice bank service charges, which are a part of your expense as well.

¾ If you pay bills online, get the computer-generated printout of the bills you pay.

¾ Pay stubs: If your spouse or any other household member contributes to the kitty, include that in your budget.

¾ Other income resources: I won’t even ask what they might be, but if you have them and know that they are consistent, include them.

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¾ Include all credit card payments, mortgage payments, utility bills, vehicle registration, food, entertainment, miscellaneous, dancing, karate, gymnastics, etc. If you don’t have a true picture of the scary truth, you will be doing this in vain.

9 Business Budget:

¾ Checkbook registers: Gives an idea of who you pay on a consistent basis.

¾ Business bank statements: Will include all of the checks and deposits made throughout the month as well as any automatic payments.

¾ Payroll registers: Do you have employees? Do you pay a lot of overtime or is it pretty consistent?

¾ Income resources: Do you bill per product or for time? Do you have a consistent income per month or does it fluctuate a lot?

¾ Cost of goods expenses: How much does it cost for you to produce what you sell? You need to find out the average and that neat trick is in Chapter 2.

9 Cash Flow Projection:

¾ Your completed personal budget:

¾ Your completed business budget:

¾ Your yellow pad of paper that you use every week when you try and figure out how much it costs you to make what you do.

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¾ A breakdown of what it is that makes the products or services that you sell, i.e., materials and cost of goods.

¾ Your yellow pad of paper that you used to calculate what you should charge your customers or clients for what you do.

¾ A breakdown of what it is you do, if you provide or sell more than one specific item or service.

9 Personal Financial Statement:

9 Current bank statements, which would include your personal checking, savings or money market accounts.

9 Investment accounts including IRA’s, stocks, bonds, CD’s.

9 Real estate: Include loan notes with balance amount and payment information.

9 Life insurance: Include all policies even if they are the $1,000 death benefit from the local credit union.

9 Automobiles: Include blue book value and note payment so that you have a current monthly payment amount. You can find your blue book value by logging on to www.kellybluebook.com

9 Other assets: Furniture, jewelry, tools, machinery, antiques, artwork, coin collections, media equipment, exercise equipment.

9 Estimating Your Income Taxes:

9 Last year’s income tax return 9 Your current year budget

9 Your current year cash flow projection 9 A good sense of humor and a stress ball

Once you have all of your paperwork handy, you can begin creating your personal budget.

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Chapter 2 Personal and Business Budgeting

One of the most common reasons why start-ups and small businesses fail is because they neglect their accounting and don’t treat it as part of their necessary business operation. Unfortunately a lot of small businesses don’t even know what it costs them to operate each month. If they don’t know what it takes to operate their business each month, you can bet they avoid their personal budgets as well. For a sole proprietor, the two go hand in hand. The investment dollar needs to come from somewhere, and most small business owners use their own personal equity, credit cards or savings to start their business, but in the process they forget that they don’t have any income just yet and sadly enough don’t have enough saved or available in capital to make it to the other side. Did you actually plan ahead, and figure out exactly how much money you needed to survive to do this full-time? You need to know what it is going to cost you. You can not afford to fall short of your expectation and all of a sudden not be able to pay your mortgage next month because your savings are depleted and your equity line is maxed! If you don’t know how much money you need to personally survive every month, how will you know how much money your

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business will need to start making in order to pay you your draw, or salary? We are going to go through this process so you will know what it is going to take for your business to make it to the other side. If your business has already been running for a while, you still need to start here.

There was a reason you were looking for a budgeting guide, and here it is!

The first place we are going to start is with your personal budget. This budget is going to give you an overall picture of your personal income and expenses paid out. The scary truth about how much money you spend will soon be plain as day, but at least now you will know and can prepare to make cut-backs if necessary.

Pull out the CD that came with this book and insert it into your CD drive.

There are two file folders on this CD. One file is for Joe Standard and includes his personal budget, business budget, cash flow projection and personal financial statement. His files are labeled “Joe’s Files”. The other file folder which contains your “working” files is named “Your Files”. They include the same spreadsheets as Joe’s, only they are blank and you will need to enter in your own data to make them complete. From your desktop or your program files, open Microsoft Excel® or Works®. If you can’t find your Excel® or Works® software, from your desktop double

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click the icon that says “My Computer.” It will take you to all of the drives associated with your computer. Once you can view all of the drives, you want to locate the drive that holds the CD that you just inserted into the CD drive. My computer has two CD drives, but you will see the title of the CD in the drive, and your drive will have an icon of a round CD sticking out of the top.

This is my CD drive. I do have more than one CD drive. Your CD will include the title of the disk once it is put in your drive. Double click on the drive to open it up.

Your Files and Joe’s Files

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Once inside the file you will see the two folders. Select Joe’s folder by double clicking the file. Inside the file, click on the spreadsheet that says Joe’s Family Budget.”

If you do not have Excel®, your computer will ask you how you want to open the file. The following template shows you what file type you need to select to open your spreadsheet in Microsoft Works®.

Select Works® 2.0 Files to open your spreadsheet. Your computer might have a newer or older version.

Select Joe’s Family Budget

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Once open, your file should look like this.

The cool thing about the internet is the amount of information you can retrieve. Instead of using the same spreadsheets that I created in the previous edition of this book, I decided to go to Microsoft’s® website and see firsthand what the consumers found the easiest and the best. I also wanted you to know where you can go to find other free templates that you can use with Microsoft Word and Excel®. If you type in www.microsoft.com and select the word “business,” you will be redirected to the business section of their webpage. Once in this section you can find templates, spreadsheets and clip art all in relation to business. This is where I downloaded the two new spreadsheets that will be a part of this chapter. The spreadsheet for your personal financial statement is one that I created because I haven’t found one that I liked, and I’m picky.

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The following spreadsheet titled “Family Monthly Budget” was the most popular and frequently downloaded spreadsheet created by a Microsoft®

user. The author was not listed, so I can not give credit for a job well done.

If you know who they are, tell them way to go for me.

The biggest difference between this spreadsheet and my old budget is that on my budget, each month is no longer listed in columns on the same page. You will need to type in each month’s budget totals separately, but I will explain short cuts later. This spreadsheet also gives you the option to see your budget versus your actual figures, which is a good tool to have.

Unfortunately most people at this point won’t have the extra twenty minutes to enter in their “actual numbers,” but I will make suggestions because it is worth it!

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The family monthly budget template is a good tool to display even the nitty gritty of your spending habits.

Let’s start with good old Joe. He’s in dire need of a personal budget. His wife Joanne has been hounding him for months to get his plan on paper,

The first column is your “budget”

amount, the 2^nd column is your actual amount spent, and the 3^rd column gives you the difference. Your

“total” expenses are calculated here.

Your total monthly income is being calculated and combined in this area.

Just like any other spreadsheet, the highlighted boxes have values, don’t type in these!

You can type over any description to state what yours are.

They are not highlighted.

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so he finally caved and decided to get his budget in order. He pulled out the list of items that he will need from Chapter 1. Joe is going to start with his general housing expenses, which are on the left side of the spreadsheet.

So far, Joe can see that his total monthly expenses for January in the housing section total $1,955. He has a way to go, but now he has a general idea of what his “housing” costs him on a monthly basis. As Joe continues going through the line items on his budget, he is modifying the descriptions to fit his particular household. The next sections are going to include Transportation, Insurance and Food.

Right now, Joe is only entering in his total projected costs, or what he knows he spends each month on average.

You can modify the description to meet your personal needs and descriptions.

If you don’t expect this particular expense in the selected month, leave it zero.

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As you are entering in your total expenses for each item, you will notice that the spreadsheet is carrying the total for you to the far right column.

After looking at Joe’s expenses you can see they are pretty generalizable.

You will find a great deal of consistency between households.

If you have more than one auto, there are additional lines to include it in this section. You can group your insurance together, or list it out by name if it is easier for you.

Be honest when entering in your expenses. It will show you where you should cut back if necessary.

Children and pets go hand in hand. Both need food and toys. Make sure you don’t leave either one out.

Joe can’t afford private school just yet, but he’s working on it.

Because Joanne works, they need to have before and after school care which costs $480 per month.

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Each section on the family budget spreadsheet is pretty well detailed. If you don’t have kids or pets, but you have a different expense that is not listed, you can modify the section title and sub titles to fit your personal life. If you had a specific hobby that you consistently do on a monthly basis, include it. You want to make sure you don’t forget anything, like racing or golf….

Here is my 101 on credit card debt. Unfortunately the U.S. is top heavy on unsecured debt, which causes enormous financial problems. Now that the

Joe likes to work out so he looks good for his wife…. Of course she has a membership as well to keep that romance alive.

Joe prefers to buy DVD’s as his reward for working so hard.

Here is the tough one, enter the

“budgeted amount” that you will pay each month for revolving debt or loans.

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government has issued credit card companies to require more principal payments towards the revolving debt, it has caused the individual and small business budget to hurt. I realize how difficult it is when people are living paycheck to paycheck trying to pay that extra $200 per month to pay down their debt however it really needed to be done. No one was stepping in on reducing the amount of credit card debt that is created by the consumer thinking they can string out the debt. The main reason for this is because of the magnitude of bankruptcies that are filed by consumers. The answer is to not only hold the consumer responsible, but to hold the creditor responsible as well. If you were one of the consumers that had a very difficult time adjusting to the new minimum balance due, it should have made you more aware of how much you were charging and what you could really afford. If you don’t make enough to pay for what you purchase by paying it off during a specific period of time, don’t buy it.

Now taking into consideration your budgeted credit card payment, you need to realize that this only includes the minimum amount that you are budgeting to pay. If you still use your credit cards during the month, keep in mind that anything in addition to the already accruing balance will cause your balance to keep going up. Therefore, if you use your Discover®

card for all of your grocery store outings, the amount charged for your food during the month should be paid in excess of your minimum payment due.

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If we look at Joe’s budget, his monthly budget for food is $600. He also used his Discover® card for wining and dining his lovely wife Joanne.

Joe’s budget allowed for $775 in food expenses for the month.

When Joe’s Discover® Card statement comes in the mail and he is tallying up the total purchases in excess of the principal balance, this is where he will add up what he actually spent at the grocery store and going out to dinner. Right now, Joe’s budget says that he will pay $775 in food expenses for the month, which is close to what is on his current month’s Discover® statement. His budgeted credit card payment to Discover®

says he can pay $150, therefore his Discover® payment right now would be $925 ($775 + $150). This way he is still in his budget, and he is paying for the food expenses that he charged for the month.

The following section is for “Taxes.” We are going to skip over Joe’s taxes for the time being and go to the next item which is “Savings &

Investments.” Every month, Joe transfers $25 from his checking account into his savings account just for the sake of saving. Joanne is the only one who has any type of retirement or investment account at work. She has

$50 per month taken out of her paycheck that goes to a 401k. They are

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also trying to set up a college fund for their kids, but have not turned it into an investment fund just yet. Instead they have been depositing $100 each month into a “child’s” savings account.

The last two sections that Joe needs to complete will be the family’s income and then the tax expense. The reason why I wanted to include them separately is because sometimes by error, the standard Joe will think that his annual salary is $42,500 per year and therefore include that amount in their budget. There is a difference between Gross Salary and Net Salary. Gross salary is the total amount of money you are paid in a given week, month, year. Your net salary is the amount of your paycheck after Uncle Sam takes everything away. I hate to see it when a client finds

The Standards have been good, no lawsuits, upset ex’s or liens.

Joe tries to be good about donating, even if it is minimal.

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out that their check is different from the amount they budgeted because they didn’t account for the taxes that were deducted.

Joanne’s total annual salary is $42,500. If I take $42,500 and divide it by 12 months, her monthly gross salary is $3,542 (rounded up). This gross salary does not take into account the taxes that were deducted from her check. If I look at Joanne’s pay stub, I will see the amount that was withheld for federal and state taxes. According to her check, she has $271 withheld for federal taxes and $29 withheld for state taxes.

Right now, Joanne is the only one with a paycheck because Joe is opening his own business.

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If you prefer, you can enter in your net paycheck under the monthly income, and in this instance, your budget would look like this.

Another instance where a payment amount is going to affect two accounts is if your mortgage payment includes your impounded payment for taxes.

I myself prefer to know how much of the payment is for the mortgage and how much is in relation to property taxes, but it is all a matter of preference. Joe’s property taxes are impounded at $625 per month, so I

Joanne’s monthly net paychecks total

$3,242.

The total taxes are zero because she already deducted them from her income.

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show his payment amount under the tax section. Some people exclude an impound account from a lender and have to pay the taxes on their own.

Either way, make sure you don’t forget your property taxes!

Your budget is now to its first completion stage. Joe has all of his current expenses and his one source of income listed in his budget, so we can review his bottom line and see how much money he spends. Our budget will change one more time during this entire process, so before we continue, SAVE YOUR FILE. You cannot save a new file to a burned CD.

You will need to create a folder on your hard drive to save your own budget. If you do not know how to save your file without losing it and not knowing where to retrieve it from, I will give you some pointers.

From the top menu bar, select File, Save As

Top menu bar, select File, Save As.

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Joe is going to create a new folder in his hard drive so he will know where to find this information. Having named his folder “Joe’s Family Budget,”

he then clicks on OK.

Select Drive C or your main hard drive.

Select the folder icon to create a new folder.

Type in your name to name this new folder.

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Once you have saved your file, you can rest assured that all of your hard work isn’t lost. Now we can look at Joe’s total monthly budget for January to see how much money his family spends.

Joe is now inside his newly created folder.

He is going to name his file Joe’s Monthly Budget with the correct month and year so he knows when the budget is for. Click Save.

To open your file (or to see it) select File, Open, or the open folder.

I can see the budget spreadsheet that I just saved in Joe’s budget folder.

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Joe now knows that without any additional source of income from him, they are short $3,052 per month to pay their personal bills. If Joe didn’t earn any money all year, he would need to have $36,624 ($3,052 x 12) in his savings account or available on a line of credit to survive all year without earning anything. Joe now has a very good idea of how much money his business will need to profit just to be able to pay him to survive each month.

When you start entering in your personal items into your budget, a rule of thumb is to always round up. It is better to estimate high and have a little extra surprise at the end of the month than to estimate low and have to come up with the difference with things such as food, phone and utilities.

Once you have finished entering in your personal expenses for the first month of your budget, you will need to create the rest of your fiscal year.

Keeping in mind that Joe has only created his budget for January, he has

Each section for Joe’s expenses are totaled in this cell.

It looks as though Joe and Joanne spend $6,294 per month.

Their total income for the month is only $3,242. Yikes, looks like Joe is short $3,052 per month.

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eleven months to go to create his entire fiscal year. Not all months are the same. Christmas, for example—it is not every month that you dole out thousands of dollars in presents, but in December you might. Months with excessive purchases tend to get forgotten in the budget. The best way to create the rest of the year is by using the first month’s budgeted spreadsheet then saving the file under multiple aliases so that you do not need to re-enter all of your data and blame me for carpal tunnel syndrome.

To do this, go to your completed monthly budget and click on the top menu bar by selecting File, Save As.

Click File, Save As.

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After you type in the new name of the file you wish to create, click on Save.

From the top menu bar select Open File.

Once you open the new file, it will look identical to the old file.

Type in the new name of the file you wish to save. Joe types Feb 2015. Click on Save.

There is now a second budget folder in Joe’s file. This one is for February. Click Open to open the file.

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Now that you have your new file, you can modify the data to fit the particular month that you are budgeting. Remember what I said about Christmas a couple pages back. Make sure that you change the month name on both the main heading of your file as well as the bottom tab so you don’t confuse yourself. To create the entire fiscal year, just continue to create new folders by selecting “File, Save As” and naming your folders the remaining months in your budgeting year.

You will need to manually change the month’s name to your correct budgeting month.

Double click on this wording to type over the old title and change it to your new month

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To see where your budget versus actual monthly expenses come into play, the best suggestion that I could possibly make is that you edit that information on your budget as soon as you pay your bills. If you pay your personal bills on a weekly, semi-monthly or monthly basis, right after you are finished, take your handy little checkbook or a copy of the bill and open up your personal budget Excel® file for that particular month. Joe finished paying his bills that were due on or around the 15^th of the month.

Joe now has all twelve months in his monthly budget file.

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As you can see, entering in your actual costs will keep you up to date on where your financial abilities are to meet the bills that are due. This type of budgeting procedure should give the standard Joe a better insight on their cash, especially when they are out shopping. The little angel should be arguing with the little devil sitting on your shoulder, telling you that

Joe’s phone bill was $10 more than the budget.

You will be able to see where reality went over or under.

According to the budget, Joe has spent $210 out of the $1,955 budgeted for the month.

Most of his auto expenses are paid by the 15^th, however the gasoline charges are on a credit card that hasn’t come in yet, so this is still open.

Joe has spent $325 out of the $650 that was budgeted for food. He knows that he only has

$325 left for his food budget for the month.

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your budget is cutting it close, so buying that new DVD player that has extra fancy bells and whistles really isn’t the best idea. If you know that your food budget has only $325 left for the month, when you are at the store your conscience should speak to you when you want to buy the lobster for $39 a pound that will only feed two people. You know you will go over your budget, and you are the one that will need to live with the choices that you make. No one else is responsible for them but you. You can’t blame it on the fish guy behind the counter….

After Joe finished paying the bills at the end of the month, he opened up the budgeting file for January and finished entering in his actual expenses.

This total is what Joe projected his bills would be for the month.

This is what Joe actually spent in January.

This is what Joe had left over in January. He didn’t spend his entire budget.

But he was still short

$3,012. Where did the money come from so that the Standards could pay their bills?

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Not everything on Joe’s budget was hit dead on. This is because of circumstances. People have a major tendency to leave out circumstance as an everyday part of life. Joe’s circumstances told him to cut back on some areas of his budget because gas prices went through the roof, and the minivan broke down and needed work. These unexpected circumstances cut into $455 worth of Joe’s budget.

The best way to avoid major circumstances is to have the will power to cut back on unnecessary purchases. Joe and Joanne decided not to go out to dinner as much in January, and not buy any DVD’s or go to the theatre like they had budgeted.

The negative numbers show that Joe went over his budget amount for these two expenses.

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If Joe and Joanne didn’t care, and figured that it was part of their budget and they could do whatever they wanted, this is what the end result of their January spending would have been with circumstances.

Now that you have a good idea of what your personal finances consist of, you can start creating your business budget. It is extremely important that you know how much this business is going to cost you or already costs you.

The company budget has the same purpose as your personal budget, but

Being able to say no is a very important part of implementing your budget.

Instead of having $40 left over, Joe and Joanne were over budget

$484 for the month because they couldn’t say no. Now they are short a total of $3,536.

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the templates are different. Once again, I pulled the budget template directly from Microsoft.com, but modified it to fit this book.

One thing that has stumped me with the “budgeting chapter” as well as the

“cash flow projection chapter” is explaining the need to create two similar reports using different templates. I wanted to explain and teach you how to create your business budget to get an idea of your overall business income and costs. The spreadsheet is a very simplified budget just so you can see “where you are at.” It is the quickest way to give you sticker shock and a realization on your actual inflow of income and outflow of expenses.

There isn’t anything fancy about the business budget. All of the serious projections will be created in your cash flow projection, which is one of the reasons they are separate chapters. The more you understand the system in setting up a basic budget, the better you will do in creating a more complex cash flow projection.

On your CD, open the folder that says “Joe’s Business Budget.” Inside this folder is Joe’s business budget template. Double click on the file to open it. Joe has been in business for a few months. His income is very minimal, but he landed a few new web design accounts that will pay a pretty good penny. The following page will show Joe’s blank business budget. This

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budget is only created on a month-to-month basis. It is a basic guideline to show Joe how much money he is spending each month on this new business venture of his.

The business budget is not separated by category. All expenses on this template are grouped together.

This is a very simplistic business budget.

You can input your expected budget and compare it with your actual numbers.

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Good old Joe doesn’t have a computerized bookkeeping system in place for his business yet, he’s working on that part, so he will grab his business checkbook and his yellow pad of paper that has all of his accounting entries and he will begin establishing his business budget. This infamous yellow pad of paper is still oh so common even in the 21^st century. Many times it seems much easier to just jot down a few notes on a piece of paper, add it together and here you go. You need to get in the habit and mind set on following through with your paper. Joe has his yellow pad of paper and can see that his descriptions for expenses are very general but ready to be entered on his budgeting template.

Joe’s yellow pad of paper….

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Joe will start at the top of the budget which is his current month income items. Joe has only one client this month which will bill out $450.00 for web design. Because Joe wants his budget to fit his business, he will change the name of the income item to web design. He enters the $450.00 in the first column.

If it is easier for you to write your income and expenses on a yellow pad of paper and transfer the numbers to your spreadsheet, I would suggest doing it the way it is easiest for you. Mark off the items as you go, so you make sure you won’t forget or miss anything. If I look at Joe’s yellow pad, and start going through the list of expenses, I can find the expense name on the budget list and enter it in that row. If the name is not on the list, there are plenty of rows to modify and change to fit your particular situation.

The follow page will show Joe’s current business budget based upon his expenses from his yellow pad of paper.

This column will calculate the difference for you. Joe needs to enter the actual to see his correct difference.

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Part of Joe’s current monthly expenses are for credit card debt and equipment purchased for the business. We will start with his credit card debt. Joe’s budget says that he owes $125 per month on a credit card. He

This column will calculate the annual estimate for your income and expenses.

This is how much Joe is short for the month.

His business will cost

$9,060 per year just for basic expenses.

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spent $4200 at Office Depot on a new computer, desk, supplies and software for his business. He charged it to his Visa card, and the minimum payment due is $125 per month. Joe also has a home equity line of credit with a $100,000 limit. He used $8,000 to purchase the web hosting server for his business. His minimum payment due on the line of credit is $175.

Joe likes to double check his numbers by comparing his total expenses on his yellow pad of paper to the total expenses added on his spreadsheet.

They are both $755 so he seems to have everything included. Because Joe only billed out $450 for the month, his cash at the end of the month will be short by $305. Unless you are really lucky, your business income will not be as consistent as your business expenses, and for that reason the need for a cash flow projection is born. Joe has included the $450 of income for the month, however circumstances happen so for the sake of argument, let’s say that Joe’s $450 was paid upon receipt of services, so he did receive it. It is his actual business income for the month. His expenses are not expected to change for the month so his bottom line number states that he is short $305. Because Joe is a small business, that $305 needs to be covered by someone, and that someone is Joe and Joanne Standard.

Joe needs to get the money from somewhere, so he pulls up his personal

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budget once again because now it is going to change. Remember on Joe’s budget, he was already short because he and Joanne couldn’t say no.

Joe needs to update his budget for January one more time because he needs to throw in another $305 expense for Standard Web Design. This is technically an investment, as well as a capital contribution, so this is where his entry would go in his budget. He throws in an extra $45 to even it out to $350.

Joe’s personal budget has now changed to

$7,128 for the month.

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Joe projected that his expenses for January would be $6,644 however his actual costs were $7,128. Since Joanne only earned $3,242 they are short

$3,886 and need to find an alternate resource to pay these bills.

Operating capital is a very important part of a new business—or an old business. If your company does not have the resources to cover its expenses, there will be no business. The materials, supplies and labor will cease very quickly if they are not able to be paid. But before you go jumping into credit debt, look at your personal finances and really review your budget. Do you need to cut back on items that are not so important for a while, so you can invest in your business that extra $200 that you spend a month for dinner and a movie?

You will need to seriously review your own budget to see what you really need versus what you really want. I can see several items on Joe’s budget

Joe needs

$3,886 to pay his bills in January.

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that can be eliminated or significantly reduced just to get him through the first stage of self-employment. You need to look deep within your means and needs and cut back on what is frivolous and not important until your business is at a point where it can afford to pay you what you’re worth.

Unless you have deep pockets, you need to adjust your lifestyle so you’re not caught by surprise when you aren’t earning what you thought you would be. If you shave off of the top now, you will financially survive longer. If you are shocked at what you see on your budget, you need to ask yourself if you need that or want it. You want to be self-employed, but you spend money like you need a job. You can’t live from paycheck to paycheck without having self-control and financial discipline. After you have finished your personal budget, take a really hard look at how much money it costs you to survive each month. If you have absolutely no income the first year, can you survive with the number that you see in front of you? If Joe is short $3,900 for January alone, do you think he has the resources to cover twelve months of that? At this rate, Joe would need to have an additional $46,800 ($3,900 x 12) to pay his bills all year without earning a dime. Do you have the financial resources to pay your personal bills let alone your business costs? You need to make the judgment call on where you have access to capital. Is it in your home’s equity, a credit line, a small business loan or your savings? Just because

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you have a great business idea doesn’t mean that everyone else thinks you do too. A great idea doesn’t pay the bills until you sell it. I don’t want you to feel like I popped your bubble, but you do need a reality check if you want to make your business succeed. It doesn’t mean that you can’t do it.

It just means that now you know what it takes to do it.

Joe and Joanne sat down and talked about what they can cut back on, and by shaving things like entertainment they just gained $357 per month.

Then they decided to cut back on toys and games, and not buy as many clothes for a while. They still want to go out to dinner at least twice a month because businesses can rob you of your relationships, and they don’t want that to happen. Just by cutting back on extra luxury items, the Standards saved over $550 per month. That is an extra $6,600 per year.

Lucky for Joe and Joanne, they have a home equity line and have some room to invest in their business. This is where the capital resources are going to come from for the Standards. For you, you need to look at your current situation. Is your credit satisfactory enough to obtain additional credit? Then you need to ask yourself how much that credit will cost you.

Let’s face it, credit isn’t free, and if you use it, it is now an additional expense. Not only will you need to cover the principal payment on the

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debt, you will now be responsible for paying the interest as well. This will change your budget again. If Joe decided to cover his shortfall by borrowing from his Home Equity Line of Credit, he just bought into another bill. He reduced his monthly debt by $550, so now he is only short $3,336. If Joe’s line of credit has a current interest rate of 7.5%, he will owe $21 in interest for one month on the $3,336 he borrowed. To calculate your interest, take your interest rate and divide it by the number of months in a year (7.5% / 12 = .63%) which is your monthly rate. $3,336 x .63% = $21.02. The total payment due is based upon a standard percentage of the balance, which is around 3% so the minimum payment made on this balance would be ($3,336 x 3% = $100.08). Because Joe has to pay interest on the money, only $79.06 will go towards the principal and the $21.02 would pay the interest.

Once Joe updated his budget to reflect the new $100 amount due on the credit line, and took out un-necessary items for a while, his new budget looks like this.

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This budget includes Joe’s shortfall from his business, as well as the additional expense of borrowing from a line of credit. Having the big picture of both of your budgets, the next big realization that you need to be aware of is what happens when you use your credit line or credit cards to support your business venture. Joe already used $8,000 for equipment and $3,336 for January’s shortfall, so the new balance on the line of credit is now $11,336. As you can see, he continues to use his line of credit, and the line of credit continues to go up. Just because he made a payment of

$175 to the line, doesn’t mean that it even made a little dent into the balance. If Joe and Joanne were consistently short $3,300 per month without the business earning an income, by the end of the year their credit line would be at $47,636. His monthly payment on this debt would now be $337. Most home equity lines only require that you pay the interest portion due, which is always not a good thing. At this rate, they would be

$100 paid to the line of credit.

Joe is going to need $3,414 instead of

$3,886.

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able to survive for almost two years tapping into their line of credit. But human nature and circumstances are always thrown into the mix, and Joanne could lose her job. The serious goal would be for Joe to show a break-even between income and expenses by the end of the first year. If this doesn’t happen and circumstances step in, before they knew it their credit line would be maxed and they would be in financial hardship. Every new business is a risk. It is an investment no matter how you look at it, and this would be the cost of the investment. Now I want you to take your investment figure from your total one-year budget, and figure out where the money is going to come from. Then you need to ask yourself how long you think it will take you to pay it back. There are a number of different scenarios that come into play when getting start-up capital. It really depends on how much money you need, what type of business you are, and whether you need a lot of equipment and start-up costs. If you require at least $75,000 in capital to start your business, seriously consider hiring an accountant to assist you in your financial projection.

Once your business is in a position where you can pay more than the minimum amount due or just the interest, you need to start chunking bigger payments to get rid of the liability. If Joe starts making enough money by his second year in business to pay down the debt, he needs to at

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least double the payment to make any significant difference in the balance.

Joe’s goal is to pay off his equity line within five years; at a balance of

$48,000 with 7.5% interest he would need to pay $985 per month for 60 months. There are several online calculators that you can use to help you figure out how to amortize your loans. One of my favorites is www.erate.com. Make sure you plan for your business debt along with your budget because it gets very ugly with the blink of an eye and your credit cards go from $10,000 to $50,000 in a matter of months. If one credit card payment is $300 per month on a $10,000 balance, multiply that by five credit cards to see how much you will be shelling out each month just to keep up with your payments. That is $1,500 per month!

Can your budget afford that? Make sure you are smart with your money and decisions.

Just like with the personal budget, you can create multiple files for each month out of the year by saving the file as a different name each time. Or, you can move on to the next chapter because your budget will play a huge role in your cash flow projection, which is a spreadsheet with the twelve months and will give you a much bigger picture of your cash flow.

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Chapter 3

Creating a Cash Flow Projection

Once you have both your personal and business budgets in place, you can start creating your company’s cash flow projection. There are two very important aspects of a cash flow projection. The first is your company’s ability to meet current cash requirements. Your cash flow projection is going to be your most valuable tool to make sure you have the necessary resources to cover things such as supplies, materials and payroll on a continuing basis. You can think of it as an elaborate budget that is assuming or estimating what you think your company will do in sales, expenses and of course estimated profits over a monthly and annual period. Your current cash flow projection will be your first priority.

Unlike your budget, your cash flow projection will get into analyzing costs associated with your product or service. Your cash flow projection will require you to have the capability of figuring out what exactly it is that you do. There are two main elements that you need to keep in mind. Number one, what is it that you sell? Is it your time, or is it a product? Number two, what does it cost you to make that product or service that you sell?

These elements would be your direct costs associated with whatever it is that you do. If you came to me and said, “I have a small business, and I

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am selling three different types of products,” I would break down the three products on your cash flow projection to show what you were anticipating in sales for each product. If you have a very large number of products, try to group them in sensible categories so that your projection is not a mile long. If you are serious about what you are trying to sell, or you have been in business for a while, I can only hope that you did take the time to research what it would cost you to make it. The biggest inconvenience in costing a product or job is the amount of time it takes you to find out all of your numbers. For example, a service company is just billable time with the majority of your expense being overhead. This is because you are really billing for your brain. A general contractor or construction company will have sub-contractors, materials, labor, tools and equipment. A mortgage broker will have appraisals, loan processing fees, commissions and underwriting fees. A manufacturer will have materials, labor costs, supplies and equipment costs. If you are in the restaurant business you will have dishes, food, drinks, labor and laundry. The list is endless. You need to think about every possible expense your business incurs to make what it is that it sells. The internet has an incredible amount of resources to find out pricing and general information on the items that you are concerned with. I’m sure E-bay® has everything.... Once you have the direct costs of what it is that you sell, you can estimate your cost of goods

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based upon that number. If you sell a product for $75 and it costs you $35 to make it, you can estimate your costs by multiplying the cost per unit by the total number of units that you are assuming you will sell. The following template is a copy of your current cash flow projection.

It looks somewhat like your business budget, except it has monthly columns to give you an annual total. Just like in the other budgets, the

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colored cells have formulas, so you do not want to type in any of those cells. You can modify the name and the date, as well as the income, cost of goods and expense descriptions. You need to make this report based upon your business, especially if you are using it to apply for credit.

Joe is going to start creating his current cash flow projection for the year.

He is starting his in January, but if you are starting yours on an off month, it is okay to take a guess at the months before so you have an annual running total. If you don’t have any data for the months prior in the year that you are creating, just leave them blank. The rows will still calculate correctly. Joe pulls out his business budget. It has the most recent data available, so he is going to begin entering his numbers from the budget into the cash flow projection. He first begins by changing the name and date on his spreadsheet.

The starting date has a value in it, so you can type in your date such as 01/01/15, and the spreadsheet will automatically apply the year to each month. If you notice on the next screen, the date shows Jan-15, which is January 2015.

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You can also put a cash balance alert in your spreadsheet. This nifty feature will alert you when your cash balance goes below the number that you typed in that cell. The first column is for your actual cash on hand at the beginning of the month. This cash on hand is from your business checking account, and your savings account if you have one. When you type in the column for the beginning balance, it will bring that total forward to each month. Your total is flowing through each column until it is spent. Make sure the cash balance you insert is your actual balance after all checks and deposits are posted. We want to know your actual available cash, not “floating” cash!

The first section on the cash flow projection is for income resources. This part is where you need to decide how you receive your customer payments.

Are you COD? Do you only accept cash sales, or do you allow your customers credit terms such as Net 30? Meaning, you are giving your customers up to 30 days to pay your invoice.

Cash alert amount.

Type in the amount that you have in your business checking at the beginning of the month.

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Joe’s web hosting is considered a cash sale. His merchant account provider bills the sale to the customer’s credit card each month. Some of his web design, however, is set up on Net 30 because his clients could go down the street to Suzie’s office and get invoice terms so he has to do it as well just to compete. He has a few web design accounts that pay immediately through Paypal®, and what a neat invention Paypal® is!

Joe’s first month in business is slow, remember he only had $450 worth of web design, but they were actual cash sales. He won’t show any collection on accounts receivable because the Net 30 would flow into February when he prepares his invoices. We also know from Joe’s business budget that he was short $305 for the month so that money needs to come from somewhere. He is going to make a capital contribution to cover it. This is what his spreadsheet looks like now.

Cash sales expected.

Returns on sales is deducted from your cash in the formula. It is entered as a positive number.

Total cash available.

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The next section will be for business expenses including cost of goods and general overhead. The rows are split by cost of goods expenses and general overhead expenses, and then by notes, loans and distributions. It is split so that you can see where your product or services costs are in relation to your general overhead expenses. It also separates any capital contributions or distributions because they are in excess of general costs and overhead. Joe is going to take the numbers from his general business budget, and enter them onto the January column for his cash flow projection.

Joe’s beginning cash.

Customer sales for the month paid immediately.

Joe’s capital contribution.

Joe’s total cash available.

Joe’s web design didn’t have any Cost of Goods expenses for January.

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Joe only has minimal expenses the first month.

His general expenses total

$455.

This portion of your spreadsheet will not include long-term debt such as car payments, loans or capital distributions.

This row adds the total overhead to the total Cost of Goods Sold.

Joe has credit card debt and an equipment note for the business.

His total cash paid out is $755 and he has $100 left at the end of the month. $855 in cash less $755 in expenses and notes = $100 left.

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Now that the basics are in, Joe can start trying to figure out the rest of his current year cash flow projection. It is a lot easier to assume and plan for an existing business than a new one. For a new business you need to look into a crystal ball and guess what you think the business will do. Joe’s goal for his business is to do more website design than web hosting because at

$80 per hour he has the capability of earning over $166,000 per year. The web hosting is a service for his clients to have the access and ease of keeping the website and design in the same location. Web hosting isn’t a very lucrative business unless you are hosting thousands of customers per month. Because there are so many new businesses popping up offering cheap hosting, Joe is trying to be competitive as well. In estimating his income, Joe first starts out estimating low. From word of mouth alone, Joe is averaging about 20 hours per month of website design service for the next three months. Because this is within the capacity of his working hours, Joe can do this work without hiring any new employees. Joe has also landed 15 web hosting customers at $15.95 per month for each customer. In order to track Joe’s accounts receivable balance, he will be using the last columns in the spreadsheet listed under “Other Operating Data.”

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The blue highlighted columns have formulas that will calculate your accounts receivable balance based upon the following formula.

Beginning accounts receivable balance Plus + total sales

Minus – total payments = new A/R balance

If you notice, the first column shows total sales of $450, yet the accounts receivable balance is zero. This is because Joe already received the $450 paid to his account for January, it was a cash payment. In February, Joe’s sales are estimated to be

20 hours x $80 = $1600 + 15 web hosting x $15.95 = $239.25

Total sales = $1,839.25

Joe has entered in his estimated sales for the next few months. He needs to project how often he will be paid for those sales. He will assume that the design clients will take 30 days to pay and the hosting customers will be charged immediately. Because Joe knows he needs to wait 30 days for

Enter total sales here. Joe’s estimated sales for three months.