The quick guide to small business budgeting

The Quick Guide to Small Business Budgeting Your Small Business Life Line Copyright ©2007 Julie A Aydlott, CFE San Diego Business Accounting Solutions All Rights Reserved First Printing: June 2007 Perfect Bound A “Non” CPA Firm Printed in the United States ISBN 13 978-0-9746093-8-6 Author: ISBN 0-9746093-8-2 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 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 Introduction Small business owners and entrepreneurs taking the leap of faith and risk to enter into self-employment generally 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 2nd 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 2nd 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 will rarely use, if ever, I 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 Table of Contents Introduction Chapter 1: Where to begin Chapter 2: Budgeting 101 Personal budget 14 Business budget 41 Chapter 3: Creating a cash flow projection 55 Chapter 4: Creating a personal financial statement 104 Chapter 5: Business and personal taxes 149 Chapter 6: Common mistakes and questions 170 Chapter 7: Troubleshooting guide 198 Index: 206 Microsoft Excel® Personal Budget Microsoft Excel® Business Budget Microsoft Excel® Cash Flow Forecast Microsoft Excel® Work in Progress Microsoft Excel® Weekly Cash Flow Forecast Microsoft Excel® Personal Financial Statement Attached File Attached File Attached File Attached File Attached File Attached File Digital books not purchased through Payloadz can receive a link to download these files by e-mail request to jasdbas@cox.net Chapter 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 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 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 dollar as far as we possibly can and if you forget to include either personal 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 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 look at all aspects of my successes and mistakes, because I have made them too, and I like my fingers and toes! Using Your Home Equity Line of Credit as Capital Quite often, the best source of funds for our business is using the equity that is in our homes It is very important that you realize what you are doing when you use your home’s line of credit This isn’t a bad choice, it is an investment, but it is an investment that has a certain consequence What happens when you tap in to your home’s equity is you are in essence selling a part of your house So many people believe that because they owe $400,000 on this first mortgage and their house is worth $800,000 they have $400,000 worth of cash laying around Well, sorry but you don’t In order for you to get that cash, you need to sell your house You are either selling it and moving out, or selling it to a bank for a prime rate Choosing the bank option, you are buying back your house from the bank, which is what your mortgage, second mortgage and home equity line of credit does It gives you the opportunity to pay them back for something that you own on paper, but really don’t have the money for in the first place or you wouldn’t have borrowed it If you use your home’s equity for your business, make sure you plan on paying it back It is true that if you chunk 194 even $100 extra per month towards your mortgage, you will significantly reduce the number of years on your mortgage loan Using your Business Checking Account for Personal Bills Try to avoid using your business checking account to pay your personal bills! Most cash flow problems are created because the small business owner treats their business account as if it is their personal account They have the habit of writing their personal expense checks out of the business which causes a huge cash flow problem with vendor bills and payroll Once you have your personal budget set up, stick by it and pay your personal bills out of your personal checking account! It makes for a much cleaner bookkeeping system as well This also includes credit cards It would be ideal if you could designate one particular credit card for all personal use and another credit card for all business use That way you are not sorting through hundreds of receipts and charges trying to figure out what is business and what is not It makes calculating the revolving balance and interest portion all the easier too! If you have a positive cash flow, try not to charge your purchases unless you intend on paying the full balance off when the statement comes in Budgeting for Inflation 195 We all know that it is very difficult to sell your product or service when someone down the street is offering it for a few hundred dollars less Cost has a lot to with sales, and most people are trying to save a few bucks Unfortunately the small business owner doesn’t want to acknowledge that it costs their business more to operate than the business down the street because just maybe their new general liability rate doesn’t take effect until July and yours hit you in March They have a few extra months of getting more work than you do, and it is inevitably going to hurt your bottom line You need to come to the conclusion that if you take a job for $30,000 and it costs you $35,000 to it, was it worth it? Do you think that the job will bring you another job months down the road that will be profitable, or you think that the customer will beat you down on your price and every job will be a loss because someone is underbidding you! Look at the longterm outcome of your decisions Not just the here and now Accountants and Software If you are able to hire a bookkeeper or accountant or are already using your accounting software, ask them to prepare the financial reports with percentages so that you can better understand where your money is going Sit down with them and ask them to show you how to read a financial report, ask them what you are looking at if you don’t know Don’t just 196 continue on your merry little way pretending like you understand what we give to you You need to understand because the less you are aware of, the more susceptible you are to cash flow problems, fraud and failure Your money is a very personal subject, you should really take time to get to know it! Last but not least, the most common problem is the small business owner not owning up to their bad money habits, accounting habits and financial problems No one likes to be told that they are doing it wrong, and criticism really does have a tendency to burst your bubble So please take it in stride from a third party who has never met you, but is pretty sure of what your reaction would be If your cash flow problems continue because you are making spending mistakes, ignoring your accounting, and getting ticked off at anyone who tries to talk to you about it, there is an old saying that will always stick in my head If you’ve been married times, maybe it’s you So if it is you, try to have the common sense to recognize your habits that could be a part of the problem 197 Chapter Troubleshooting This will be the most frustrating part of using any spreadsheet software for the person who is not computer savvy There will be times when you accidentally override your numbers or formulas and you won’t know how the heck to get them back One of the beautiful things that you can with the original CD that came in this book is to use it as a reference because you can’t ever override the files once they are burned to the CD The most common problem is when you accidentally type in a cell and override the formula This will cause your totals to no longer calculate for you Normally when this happens, you will see an error that looks like this We can see a #VALUE! error in a highlighted cell Because I purposely typed a “g” in this highlighted cell 198 If you type in a letter in a numeric cell, it will give you an error sign in each cell that calculates a value The error will normally say #VALUE!, instead of a total However, if you accidentally type a number in a numeric cell, it won’t show you that there is an error because it is not reading a mistake In this instance, it is important when you are reviewing your spreadsheets to compare row totals to see if the balances are correct, or if they just don’t seem right If you had the same expenses from January to February yet your spreadsheet looked like the following template, you would know something was just not adding up correctly April is totaling $1,839 however March doesn’t show a total at all But we can see that we had $1,600 in sales and $239 in cash deposited Something isn’t right You can see what formulas are calculated in the highlighted cell by taking your mouse and clicking on the particular cell, leaving your curser there The next page will show another screen shot with my mouse clicked on row 16, column d 199 This is your calculated cell formula These are your columns These are your rows My troubled cell which is not calculating the total deposits is showing just a number, not a formula We know that this one is the one that is wrong My cell is showing zero which means that I typed over the formula Which causes a calculation error 200 The easiest way to fix your error is to copy the formula from a cell next to your incorrect cell You must make sure that the cell you are copying is doing the same calculation for its particular column To copy a cell to another cell, take your mouse and click on the cell that you wish to copy Then, from your file menu which is at the top of your screen, select Edit – Copy File menu – select Edit – Copy We are going to copy this cell After you have copied the formula from the desired cell, take your mouse and move it to the cell that is incorrect From your file menu, select Edit – Copy – Paste 201 Your cell now has the correct formula and is calculating the correct column as well Your program will automatically change the column letter for you, so don’t worry if you are copying column d to column c, the software will place the correct column in your formula When you need to insert a row into your spreadsheet because you don’t have enough room for all of your expense items, make sure that you are inserting them a few rows up from where a formula is being calculated This way you won’t take the risk of overriding a formula and not knowing how to get it back If you insert a new row, your formulas such as the one we just fixed, will automatically increase the number of rows they are calculating for their totals This way of proceeding is the easiest 202 Place your mouse on the description area in which you need to insert another row From your file menu, select Insert – Row Insert – Row I’m inserting my row here Once my row is inserted, it will look like this Blank description – blank row – blank cell formula Because my new row is completely empty, I can fill it in with the desired information The only place your new row is not going to calculate its grand total is in the very far right column You will need to follow the steps before for copy and pasting a formula from one cell to another Our newly added row now looks like this 203 If you are trying to add rows or columns in any other spreadsheet included in this book, the procedure is the same Just make sure you are copying any necessary formulas that could have been changed by this procedure If you are still having a difficult time trying to correct an accidental override on your saved spreadsheet—notice how I emphasize “saved”—then pull out your original CD and load up the form you are currently working on Locate the area on the CD form that matches the spot where you’ve got an error, and compare to your spreadsheet by highlighting the cell so that you can see what is inside it You can copy the cell formula from one spreadsheet to another just the same way as you did when working within a single spreadsheet Another really neat trick is to take your mouse and click on the cell for which you want to know what area it is calculating After you click your mouse on that cell, press the F2 key on your keyboard It is normally up above your number key When you this, your formula will highlight the entire area that it is calculating with a colored border, plus it will show you the formula—or not, if you erased it—that the cell is calculating 204 My curser is currently on this key, column G, row 58 Notice the border around these cells? This is what column g, row 58 is calculating These basic pointers should be able to get you through dealing with those frustrating mistakes Make sure you frequently back up your spreadsheets to your hard drive and burn them to a CD so that you don’t lose all of the work you have just accomplished 205 INDEX A Accounts Payable 83, 90, 128-129, 141 Accounts Receivable 60, 63-66, 70, 83 Accountants 196 Accounting Quarters 154 Assets 8-9, 13, 103, 107, 111, 114-140, 156, 167 B G H Health Insurance HELOC Hiring Employees H&R Block Backing up files Bankruptcy 190 Bookkeeping Software 169, 175, 196 Break-Even Analysis 187-190 Budgeting 14 Business 12, 42-44, 54-58 Personal 11, 15-40 Business Use of the Home 164-165 I C K Capital 48, 53, 71, 194 Capital Contribution 47, 60-61, 179 Capital Distribution 62, 181 Capital Purchases 181-182 Cash Flow Projection 8, 12-13, 55-77 Cost of Goods 85-86 Costing 56, 75, 93 CPA 154-161, 168 Credit Cards 143-147, 175, 178, 195 143, 145-146 168, 190 165-166 E Enrolled Agent Estimating Taxes Excessive Distributions F 206 195 51-54, 143-148, 153, 163, 202 J L Liabilities 9, 77, 108-147 Licensed Tax Preparer 9, 154, 156, 157, 161, 168 Loans 54, 23, 61, 75, 135,141, 145 Luxury Vehicles 163, 168 M D Debt Ratio Depreciation Donations & Contributions Inflation Interest 165, 181, 195 Inserting Rows 160-161 116, 193 185-187 155 155-156, 168 13, 149-169 180 Medicare 10, 153, 159-160, 186 Microsoft Accounting software 169, 176 N O October Effect Operating Capital Opening Spreadsheets In Microsoft Excel In Microsoft Works Overspending Owner Draws 182-185 48, 71 6, 10, 15 10, 17 170-175 152, 158 P Payroll 12, 55, 73, 77-81, 85, 90, 95, 99, 152-153, 159-160, 179-180, 186-187, 191 Personal Budget 11, 15-40 Personal Financial Statement 4, 8, 13, 103-147 Penalties 149 Procrastination 175-177 Profitability 179 X Y Z Q Quarterly Taxes 137, 154, 156-157, 159160 QuickBooks® Advisors 169 R Rapid Growth 177-179 S Saving your file SBA Loans Section 179 Election Social Security 29-31 191 163, 168, 180 10, 135, 142, 159 T Tax Bracket (Estimated) 151 Tax Refund 149 Taxes Estimating 13, 149-158 Self Employment 76, 137, 145, 151,159-162, 166 Travel & Entertainment 163-164 Trouble Shooting 198-204 Turbo Tax 155 U V Vehicles 9, 17, 134, 140, 163, 167-168 W Weekly Cash Flow WIP Work in Progress Report 78-81, 88 91-103 91-103 207 ... your ability to survive over the long haul The Quick Guide to Small Business Budgeting 2nd Edition was created to help the small business owner who doesn’t quite understand accounting to create... 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 Dedication To the love... The Quick Guide to Small Business Budgeting Your Small Business Life Line Copyright ©2007 Julie A Aydlott, CFE San Diego Business Accounting Solutions All Rights