The quick guide to small business budgeting

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 question

The Quick Guide to

Your Small Business Life Line

Copyright ©2007 Julie A Aydlott, CFE San Diego Business Accounting

Solutions

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

woman in the world

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

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

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

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

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 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 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

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 1st Quarter, 2nd Quarter, 3rd

Quarter and 4th 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®

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

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

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

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

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

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

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

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

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

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!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 15th of the month

Joe now has all twelve months in his monthly budget file

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

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?