The Quick Guide to Small Business Budgeting 2nd Edition

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 9

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

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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 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

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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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Table of Contents

Introduction

4

Chapter 1:

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Where to begin

Chapter 2: Budgeting 101 Personal budget

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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:

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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 [email protected]

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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 dollar as far as we possibly can and if you forget to include either personal 7

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 1st Quarter, 2nd Quarter, 3rd

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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®.

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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.”

Select 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.

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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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Your total monthly income is being calculated and combined in this area. The first column is your “budget” amount, the 2nd column is your actual amount spent, and the 3rd column gives you the difference. Your “total” expenses are calculated here.

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.

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,

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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.

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.

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.

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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.

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. 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….

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.

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

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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 25

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.

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

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

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

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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.

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

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.

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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.

Joanne’s monthly net paychecks total $3,242.

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

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

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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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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.

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.

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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.

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.

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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.

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 32

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

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.

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

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

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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

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.

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

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.

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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 15th, 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.

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

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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 is what Joe actually spent in January.

This total is what Joe projected his bills would be for the month. This is what Joe had left over in January. He didn’t spend his entire budget.

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But he was still short $3,012. Where did the money come from so that the Standards could pay their bills?

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

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.

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

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.

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.

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

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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.

This is a very simplistic business budget. You can input your expected budget and compare it with your actual numbers.

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

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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 21st 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.

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

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.

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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.

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

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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 needs $3,886 to pay his bills in January.

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

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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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$100 paid to the line of credit.

Joe is going to need $3,414 instead of $3,886.

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

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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.

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

Cash alert amount.

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.

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Cash sales expected.

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

Total cash available.

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.

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Joe’s beginning cash.

Customer sales for the month paid immediately.

Joe’s capital contribution.

Joe’s total cash available.

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

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Joe only has minimal expenses the first month.

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

His general expenses total $455.

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

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

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

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web design payments, he enters the amount expected in the following month’s “Collection of Accounts Receivable Due” column at the top of the spreadsheet. Estimated collection of receivables due.

He will be paid in March for the February invoices. Joe enters the web hosting income immediately because he received it in the month it was billed.

Based upon Joe’s projection, his available cash is gradually

increasing, but he still needs to figure out how much his growth is going to be for the remainder of the year. Joe’s new accounts receivable balance is showing the customer payments posted against his accounts receivable aging, plus his current sales leaving the current balance due.

You can see that in February, Joe’s sales were $1,839 and he received $239 of the $1,839, which leaves an accounts receivable balance of $1,600 due. 65

This total matches the total in the accounts receivable row for February. Now Joe can focus on the rest of the year’s sales and accounts receivable balance. How much growth does he expect? This is the part that involves a “projection.”

From January to February, Joe’s sales jumped about

300%. That is a stiff projection to live up to. What would be a gradual and easy to manage growth rate? Of course Joe wants to earn enough to pay all of his bills and not pull against his line of credit. This would be the most feasible goal to live up to. The cash flow projection at its current stage will give you an idea of what to look for when trying to plan your strategy out. Joe is going to work hard at increasing his 20 hours of billable web design time per month to 30 hours by the first part of June. He also intends to increase his web hosting customers to 25 from 15. Joe believes he can be this consistent for the next four months, so he is going to add his assumption to his cash flow projection for June through September. His gross monthly sales now change to this: 30 hours x $80 = $2400 + 25 web hosting x $15.95 = $398.75 Total sales = $2,798.75

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Joe is showing cash available because he hasn’t “used” it yet.

Now that Joe can see the next four months of projections, he needs to account for how he thinks he is going to get there. The average company spends between 15 to 20% of their gross sales on advertising. Let’s face it, advertising isn’t cheap, but if you can figure out a method that helps get your business in the limelight without spending your entire bankroll, do it. There is an excellent book called Getting Business to Come to You, 2nd Edition by Paul and Sarah Edwards. Great advertising and marketing ideas! It is worth the minimal investment. Joe is going to allow 10% of his sales to advertising because the majority of his web design has been word of mouth and he’s trying not to make big advertising mistakes.

The

expense section of the cash flow projection will need to be updated to include any new expenses in relation to the growth of sales. It does cost money to make money, so make sure you are accounting for the additional costs to make your money! Joe also feels that he can pay himself a draw of

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$1500 per month starting in June when the additional web design takes place. This draw will help with the shortfall on the personal budget. The Standards won’t need to tap into their line of credit so frequently. Below is Joe’s updated cash flow projection with his newly added expenses. He has updated his advertising dollar, his internet access went up another $15 per month because he is using more of it, and gasoline just hit $3.40 a gallon again!

Joe is now paying out $840 per month in business expenses.

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Joe starts deducting a draw of $1500 per month. He is short $41 in June. Therefore his draw should only be $1300 to leave additional money in the business account.

One more estimation and Joe should be finished with his first year’s projection. By October, Joe really wants to be billing out a full 40 hours per month in web design services.

This is a pretty steep estimation

considering it takes time to build up a client base and reputation. Throw the October effect into the mix and October through December will not be very profitable for Joe at all. You can learn more about the October effect in the common mistakes in Chapter 6. So in the meantime, Joe’s going to take that into consideration and show a worst-case scenario for the last quarter of the year.

Joe shows a huge drop in web design the last two months of the year. His total year cash receipts total $22,100, and considering he is a new

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business, that is pretty good; of course take out that $305 owner contribution and $21,795 is still not bad.

Joe’s total cash paid out for the year on general overhead and operating costs is only $8,410. He paid out $3,600 to equipment and loan expenses, and was able to take $9,600 in draws.

Joe’s accounts receivable balance at the end of the year is $800. He needs to make sure he includes this number in his following year’s projection.

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Once you have your current cash flow projection created and saved, you can start playing around with your long-term cash flow projection. This is the fun one that will guide you in the direction of future profits and revenues. The idea is to focus on a goal for growth. Not all businesses want to grow so much that they can’t handle the load, and most businesses have an idealistic dream of where they want to be in one to five years. We all like to think big: large sales, large accounts and of course large profits. It doesn’t always work that way as we learned from our budgets, however the long-term cash flow projection is supposed to be a bit more entertaining because it isn’t as real yet. You must work at your business in order for it to work for you, that means working the numbers too!

Joe is going to focus on his gradual growth rate, thinking about when he will need to hire employees and how much operating capital it will take to do this. In the second year, Joe still has liability from the equipment and start-up costs. Because Joe was able to reduce the amount of money he needed to borrow against his line of credit, the credit line only increased $27,600 by the end of his first full year in business instead of his projected $46,800.

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To make another cash flow projection using the same data, you can save your current open file as a new file name leaving the old file intact, just the same way as creating multiple monthly family budgets. Don’t forget to change your file name and then of course the correct date within the new cash flow projection. In this case, Joe saved his file and renamed it “Joe’s Cash Flow Projection Year 2016.” The reason why I recommend using your already created cash flow projection is that you probably spent hours putting the descriptions in that fit your particular business and you don’t want to do it again with an empty cash flow projection!

Once your new file is opened and ready to go, start off with your estimation on your sales once again. How much do you want to try and increase over the next fiscal year? Joe is going to set his goal for 80 hours of billable time per month and 30 web hosting customers for the first three months of the new year. He is currently billing out only 30 hours per

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month so his growth rate needs to be over 150%. His focus is going to be on new clients and marketing so that he can hire a full-time employee by the end of the first quarter of the year (March). In order to hire a full-time employee, Joe needs to figure out what wage he is going to pay for the new employee. The going rate for web-design employment in his area is $16 per hour. This is of course going to affect his cash flow with payroll taxes, workers compensation and possibly health insurance. At 80 hours per month, Joe would be billing out $6,400 per month, plus the $478.50 in web hosting. Keep in mind that unless your projects are really overloaded on a normal 40-hour work week, you should be able to handle completing it all yourself, if that is your job! Hiring an employee prematurely is a very expensive lesson in cash flow. The following page is what Joe’s estimated first-quarter cash flow projection will look like.

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Sales are increasing well.

But adding an employee prematurely cuts way into profits.

Advertising and marketing jumped to 10% of sales.

Joe needs to start planning a payback strategy on his line of credit. Joe is able to take a draw with his sales increasing.

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If I were Joe, I would wait until he is more established and billing out more per month before hiring an employee. But determining when and how is always the fun part. What would be the break-even point for Joe to hire an employee without cutting into his paycheck and profit? Because he is a “service” company and should be able to include his own 40 hours per week as part of the estimation, he needs to figure out the ideal break-even for hiring an employee to do more web design. There is more on reviewing your break-even in Chapter 6, but for now, Joe’s employee would be making $16 per hour, plus taxes, plus workers comp and health insurance. This would cost Joe about $3,200 per month or around $21 per hour. If Joe bills out $80 per hour for web design, he would need to bring in an additional 40 hours of web design services per month (40 x $80 = $3,200). Right now, Joe is only billing out $6,400 per month in web design which is the equivalent of 80 hours. His average expenses are $1,538 including loans and credit card payments. This means that Joe is really only making $60.78 per hour on the 80 hours. But because the normal work month is 160 hours, he is really only making $30.39 per hour because you know he is working his butt off trying to market, grow and keep the business going. So that being said, can you settle with $30.39 per hour, or do you bring in an employee right away costing you $21 per hour, so now you are making $9.39 an hour ($30.39 - $21.00 = 9.39)? See how

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beneficial that is now? Let’s change the assumption that Joe brought in another 60 hours of web design for the last three quarters of the year, and hired his handy employee. He is now billing a consistent 160 hours per month.

Because Joe’s sales jumped drastically, he needs to start paying himself a paycheck because he is going to get nailed in self-employment tax because

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he is not a corporation. So Joe adds himself to the payroll and starts paying himself $4,000 per month, plus he still receives his distribution because there is a little left in the kitty at the end of the month. He decides that it would be wise to take the distribution amount and pay down their line of credit. He makes sure that he increases the company’s expenses as the growth continues.

With this cash flow projection, you can create an assumption for as many years ahead as you can plan. Not all businesses are the same, but the accounting and budgeting is a necessary part of each business. Once your cash flow projection is complete, you will need to add one final item to your list of liabilities, which is now your business tax if you are showing a profit. Once you complete Chapter 5, business and personal taxes, you will be able to come back to your cash flow projection and add in your tax liability so you don’t forget that it is out there! If you are a product company and need to charge sales tax to your customers, you need to include that as well. Taxes are the most often ignored and neglected because frankly, we don’t like to owe them. Unfortunately, only an act of God will remove the tax burden from everyone, so don’t forget to include it in your projection and your budget!

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9 Creating a Weekly Cash Flow Projection When your cash flow is at a critical stage and every last penny seems to count, there is often a need to create a weekly cash flow projection. In this instance, the small business is now living week to week trying to cover payroll, vendor bills and general overhead.

The owner of this small

business usually has a hard time meeting his or her own personal bills as well.

When you create a weekly cash flow projection, you are giving

yourself the ability to look closer into your financial future. If you are at this point, you really need to know what payroll is going to cost next week, what customers still owe you money, and how much you need to collect to cover the expenses that are coming up. The template created for a weekly cash flow projection was an invaluable saving grace tool for one of my clients who needed a much stricter budget plan. Let’s say Joe’s brother Brian Standard had a cabinet shop. He has been in business for quite some time and hit a slow time with contracts. He has five guys in the shop and one office person, plus his own salary, so he is carrying a good-sized payroll load for a small business. His vendors have become over 60 days past due, and some are even getting to the 90 day mark. The first thing Brian needs to do is make his general business budget, because I’m sure he hasn’t done that yet. This is the one that will give him the numbers to put together his weekly cash flow projection. Brian did an average of his

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expenses based upon his checkbook, bank statement, customer invoices and vendor bills. This is what his budget looks like.

It looks like he is doing okay, each month he should have an excess of $10,000, but circumstances always prevail, and customers don’t pay when they say they’re going to. Maybe you took one too many distributions that

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should have stayed in the business checking to cover the increase in general liability insurance that nailed you hard. So Brian is trying to figure out where his money went, and why he is having such a difficult time paying his bills. The next spreadsheet is a weekly cash flow projection. The layout is different in that there are a standard four columns across the top signifying each week’s expenses. You will find two tabs at the bottom of your “weekly cash flow projection” spreadsheet.

Your two tabs. One is a five-week schedule and the other is a four-week schedule.

As you know, some months have an extra week in them, and if you run your payroll on a weekly basis, your budget in August could be hurt by an extra $10,000 that you forgot about just because of that extra week. In order to give you the complete weekly spreadsheets there are two included to allow for the four-week month and the five-week month.

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Now that Brian has his estimated monthly budget finished, he can begin his weekly cash flow projection by figuring out what time per month the bills are paid. His payroll is weekly, his vendors need to be paid weekly as their bills become due, but credit card payments, auto payments, notes and general overhead bills are due usually at the first or the last of the month. The best time to schedule bills so that they are paid early is to pay bills on the 10th and the 25th of the month. That way it gives plenty of time for mail or pressing the send button. The next page is a blank weekly cash flow projection for Standard Cabinet Corporation. Just like with any other spreadsheet, the shaded boxes have formulas so do not type in these areas. This spreadsheet is relatively easy to fix if you type over a formula—which is explained in Chapter 7. Brian is going to start with the first line item which is his checking balance. The very first cell which is not shaded needs to have a beginning checking balance in it in order to calculate the correct cash flow balance.

Grab your checkbook, and enter the bank

balance after you posted everything!

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Enter beginning balance here.

Enter that number in week 1, first row. Brian started out with $3,500 in his business checking account so he will enter that number in. He isn’t putting any capital in just yet, and needs to figure out which customer invoices will be paid during the month. You will need to look at the

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consistency in how your customers or clients pay your invoices and create your cash flow according to that. If you have a customer who is notorious for paying at 45 days, and your invoice was sent to them last month, you know you are not going to get it during this month, so you would plan to receive their check in the following month’s projection. Never count on the inconsistent customers; make your phone calls and try to create a realistic timeline for payments coming in. In the ideal world, your system would be computerized and you would be able to print out a current accounts receivable and accounts payable aging report showing you all customer and vendor bills due.

But not everyone is set up with an

accounting software. If you have a current accounts receivable aging and accounts payable aging report, get it handy because this will be a timesaving tool in creating this report. If you do not, you need to grab all of your unpaid customer invoices and all of your unpaid bills due. Start with your accounts receivable. Who owes you money? When were they billed? How do they pay, on time, late, early? Do you expect a retainer or a deposit on a job? This is where you would include all of the money that you expect to collect in the specific month you are working on. Brian wrote down his open invoices on his yellow pad of paper, and came to the following conclusion on who still owed him money.

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Brian has one customer who is 65 days past due, and he really needs to collect on this money. He also has a few customers who are over the 45 day mark. He expects to receive the money on invoices 1485 and 1505 the first week of January. He doesn’t expect to get paid on invoice 1501 until the second week, and 1506 on the third week. He is hoping that invoice 1513 will come in on the fourth week. The Big Medical Center always pays at about 60 days so he won’t see that money until February. The beginning bank balance, plus the expected payments for the month.

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It looks like Brian is going to have a cash flow problem for January. His estimated expenses are $67,184 according to the budget and he is only expecting $56,529 to come in. This is where he will need to prioritize his vendor bills and make sure he can still get materials to build these jobs. One sure thing is payroll, you can’t not pay your employees without getting in trouble. Brian doesn’t have access to a line of credit and his credit cards are maxed, so he’s in a whirl of trouble. Next step is to enter in all of the normal bills that come in every month. The COG – Vendors account is highlighted because the numbers will be automatically transferred later.

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It looks as though Brian is going to have a cash flow problem paying his vendors, who are not included in the previous report.

His end cash

balance before vendors are paid is $11,450. It’s time to be nice to the vendors and let them know what he can pay. If you scroll down past a blue line on your spreadsheet, you will see the following schedule.

These totals are moved up to the correct week for that COG – Vendor. You must enter in the amount and vendor name for your report. Enter your Vendor names and total amount to be paid in these rows and columns.

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Once you have determined how much money you are expected to pay out, you can budget when and how you will pay your vendors. Keep in mind that all of the standard bills that are due are based upon your actual bill that comes in the mail. Hopefully your expected amount due is less than what you have on your cash flow projection so you have more room to pay more important bills. It looks as though Brian is supposed to pay out $31,993 this month in vendor bills, but his cash flow says he will be short.

He is short a total of $20,543 to meet his requirements. Keep in mind that he still has to collect on the receivables that are coming in.

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This is where you need to go through your bills and customer payments to see how you are going to juggle your money. Once you have a cash flow problem within your business, you are causing other businesses to have a cash flow problem as well. If you don’t think the bigger companies aren’t budgeting how you pay them, think again. They need to make their capital and revenue cover their expenses as well, and when problems start occurring with their customers, it becomes a vicious cycle. The next page shows Brian’s weekly cash flow projection including all vendor bills due as well. His report shows that he is going to be short by the third week of January and continue into the fourth week. To get through the crunch he will need to figure out a game plan on either trying to get more money in, or trying to juggle the absolute priorities for the vendors that can wait another week or two. Don’t forget to project at least three months out. If you know your jobs last an average of two months, what happens if the third month you don’t have any sales whatsoever? You still need to meet those general costs, so you will either be cutting into your job profit or you will need to borrow money to survive. If you know beforehand, you know when that next contract needs to be signed!

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9 Creating a Work in Progress Report Not every business needs a work in progress report, but if you are in the construction, manufacturing or specific trade industry where your jobs are

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based upon budgets, you will soon find a critical need to create a “WIP” report. A WIP report is an elaborated cost report showing in detail each budget expense and expected revenue with a running total of the net result.

Most small businesses don’t have the extra budget to hire a

professional to keep on top of their job progress and budgeting so they end up creating a budget breakdown on their infamous yellow pad of paper. I created the WIP spreadsheet for my husband’s construction company so that we could update the numbers after each accounts payable check run. If a specific job cost was going over budget, we would know in advance what the damage was going to be to the overall profit of the job. When you are bidding jobs based upon a hard number, there is little room for change orders or errors unless it was justifiably so. The bid is a final say-so, and in order to reach your expected profit, you need to stay within the budget which includes payroll, cost of goods, sub-contracted labor and general costs associated with that job. Just like any other spreadsheet, you can modify the description to fit the needs of your business type.

The

following template is a blank work in progress report located on your CD within the Cash Flow Projection folder.

Fill in your job information here. Enter your contract amount here. You can add any change orders next. The value in the Total Contract cell will calculate for you.

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This column is how much you have paid per budget item. This column will calculate your budget balance remaining to date. This column will calculate how much you have paid to date. You can modify these descriptions.

Enter your budget amount here for this section.

Open up Joe’s WIP report from your CD. Let’s say that Joe changed professions for a brief moment….

He is now a contractor.

Joe just

finished putting together a bid for a Fire Arrest System and was awarded the job. Joe will need to take his bid numbers for the specific job and enter them onto his blank WIP report. The following page is a copy of Joe’s bid for the Fire Arrest System.

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This is the total revenue billed on the job, excluding change orders.

These are the cost of goods expenses Joe will list in the description box.

These are the budget numbers that will be listed next to the descriptions.

This is Joe’s expected budget costs.

This is Joe’s expected Gross Profit and his profit margin.

Joe’s bid write-up includes each break-down of general costs relating to the job itself. If your bids do not include break-downs, which most don’t, make sure you have your write-up sheet that shows you where you came up with your numbers. You will need them to create your WIP report. Also, take special note that your Gross Profit is not your company’s total profit. A gross profit is the amount of money you have left over after

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you’ve billed your customer and accounted for all expenses relating only to the job. Your Net Profit is the total of your earned income after your overhead expenses are deducted from your gross profit. This is why it is very important to make sure you are bidding or costing your jobs correctly. Each business has overhead expenses, and often a bid is created based upon the cost of the job and your overhead is not calculated into the total. If it costs you $10,000 in labor and materials to perform a job and your overhead is an average of $325 per day including insurance, office expenses, administrative, etc., and the job lasts for 15 business days, your total costs and overhead for the job are $14,875 (325 x 15 = $4,875 + $10,000) . Now where is your profit? Face it—you are in business to make a profit, therefore if your profit or overhead is not included in your bid, you are already in trouble. When Joe bid his job out, his contractor’s overhead and profit is calculated at 25% of the total job costs. Joe is going to start by entering in the customer and contract information for this job on his WIP report. Joe’s customer name, job name, job number and date of contract.

The total contract amount.

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Next, Joe starts entering in his budget items from his estimate sheet. The first item is for an architect.

Joe enters $4,500 as the budget amount for the architect expense.

The total amount is still available in this budget.

Enter the companies that are providing the product or service, and their bid amounts.

Joe will be able to see what percent of this job was for the architect.

If you notice on Joe’s spreadsheet, he has the names of the companies or agencies who are providing services or materials for the job. The following column, which is the budget column, has the amount of the company’s bid to Joe. This column does not calculate or carry forward to the totals, it is for reference so you know how the bid was broken down and what the other company’s bill should be when it arrives. The next column, which states “Standard Paid,” is Joe’s company. This column is where you would enter in how much was actually paid for this portion of the WIP report. If you don’t have bids or estimated costs for your vendors or subs, leave this column blank. The next column, which is “Total paid to date,” is going to pull the total payments made in each expense section and give you a running total so you know how much you have spent so far. Then of

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course the final column, which is your budget balance, will calculate how much of your budget you have left. Joe’s next expense accounts are for Demo Prep, and Demo. The numbers from his estimate are entered into the budget amount for each description.

Once Joe has all of the budget numbers entered into his WIP report, the last columns will calculate the total amount available in his budget for this job.

Payroll includes gross wages, overtime, taxes and workers compensation.

The total budget amount should equal your total budget costs on your estimate.

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Below the “Total” row is a breakdown of your total contract less revenues and budget balance remaining.

Because this is still a relatively blank template, the only numbers showing up on the calculation will be the budget numbers. As the job progresses, Joe will update his WIP report as often as he pays his bills that affect this job. If you have less expense accounts than the spreadsheet shows, just leave any unneeded sections blank so that you don’t affect or change the formulas that are calculating the totals for you.

This particular

spreadsheet is tricky to add additional sections to because of the formulas, and most of you don’t want the added burden of learning another job, so I have created three separate blank WIP reports that are included on the CD. The WIP reports are tabbed “Small,” “Medium” and “Large.” This option should give you enough elbow room that you won’t need to learn how to create formulas in Excel®.

Joe has finished up his three-week project on the Fire Arrest System and has been entering in his actual expenses as time has progressed with this job. He starts back at the Architect section, and the county gave him such

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a hard time because of a little white bug, he had to do an additional environmental study before he could get his permit. The architect charged him an additional $2,500 to put this together and the county charged him another $1,000 for the survey. He was able to write a $4,375 change order on this job—I included contractor’s overhead and profit. His first budget expense now looks like this.

Joe is over budget by $3,600, this is where a justifiable change order is billed.

This budget is overdrawn, and the architect is 7.92% of the entire job.

Joe submits a change order for $4,375 and it is approved. He can now update his budget to include the change order, which would make it look like this. The change order is added here.

The budget amount is changed to include the change order.

There is $775 left in this budget, and a total of $8,100 spent.

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Joe also included the dates that the expenses were paid on, for reference. As he goes through each budget expense and logs in all of the actual costs associated with each portion of the job, he can get a very clear picture of where things stand.

It looks as though Joe went over on his Demo-Prep bid by $350, he bid short on the roll-off. The Demo was ahead by $200, which gives him a total shortfall of $150 to date. Demo Prep and Demo were only around 2% of his total job.

It looks as though Joe was hurt pretty bad on his trenching costs. The ground was too hard and they needed a heavy piece of equipment to break through. That cost him dearly.

Trenching ended up being almost 11% of his budget, and left him short $2,416 on the job. With additional funds from other portions of the job, Joe still has the ability to make it within budget, and at least right now in 98

the game, he knows where he is at. Review Joe’s WIP report to familiarize yourself with what yours should look like. By the time Joe gets down to General Conditions and Payroll costs, he can see the overall picture of his job’s budget.

You can group gross payroll, taxes and workers comp so you don’t have a report a mile long.

This is the final outcome of Joe’s WIP report once the job is complete.

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His subs paid to date are $79,001 which matches his total column as well. The contract amount changed because of the change order, and he ended up being over his budget by $2,082. If Joe looks at his gross profit margin on the job, his estimated profit decreased by 3% because he went over on his budget, and he can look back at what portion of the job went over. His gross profit margin is now $23,230.

If Joe operates at $325 a day as stated before, and the job came in 10 days late to 25 total days, his net profit on the job would be based on the following;

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If this were an actual job then Joe did okay even though he came in over budget, he still made money. The following page is a reduced image of Joe’s complete WIP report. Each section gives a complete break-down of his total allotted budget, the total amount he paid for each expense, a running total of what was paid to date per expense section, and the budget balance left. The only bad news with this WIP report is that you need to do the manual work yourself by entering in all of the data. At least you will know where you are at.

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Each item is listed by vendor or sub and accounted for.

You will be able to see what is left in your budget, or if you went over.

You will also be able to track what percentage was for that specific portion of the job.

It looks as though Joe went over on his Trenching and Paving which caused the budget to go over his original estimate.

Joe’s totals are calculated in this row.

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The best advice that I could give to you when creating your cash flow projections, budgets and WIP reports is to be consistent with them. If you put them off until you have time, or don’t want to know the truth, you will inevitably have cash flow issues at some point in your business. If you are aware of where you stand, you will be able to project your growth, stability and future. Without this overview, you are destined to live paycheck to paycheck hoping the next job that comes in will cover the last one you barely pushed out the door. The choice is yours.

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Chapter 4 Creating a Personal Financial Statement Have you ever been sitting at a bank, an attorney’s office or with a lender filling out all of that lovely paperwork for your personal financial statement? Being inundated with questions and paperwork is absolutely no fun. Throw confusion and pressure into the mix and it becomes more of an enormous burden than anything. During 2004 I was able to take care of my mom during her nine-month battle with lung cancer. I was in charge of all the paperwork. After she passed away, I realized that I had been doing the exact opposite of what I recommend to all of my clients. Because I had been so overloaded with work and life in general, I had neglected my own paperwork. I couldn’t imagine the enormous burden that I would leave for my husband and girls should something happen to me. I had to finally put aside some time so that my husband and I could finish our living trust. I would really hate to see all of our hard-earned assets go through probate because I procrastinated. So a few months into the year I bit the bullet and made my appointment with our attorney to set up our living trust. The first thing he asked me to do was fill out a personal financial statement. Not only is this time consuming, but the number of items on our list was huge. Sitting at my desk staring at the pile

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of paperwork, I knew that I needed to create an easier way to get this information at the push of a few buttons. Not only do our estate attorneys need this information, but what about when we are applying for large lines of credit or new mortgage notes? I am constantly filling out personal financial statements for clients because they don’t know what they have, either. I already knew I would be working on a second edition to the budgeting book, and realized this was the perfect opportunity to create a simplistic spreadsheet that calculates all of the numbers for you without you needing to hand write everything down every time someone requests a copy of your personal financial statement. That being said, we are going to make your life just a bit easier by creating a file that you can access and update whenever items in your personal life change.

In order to piece together your personal finances, you will need to gather the important documents listed in Chapter 1 on page 10. If for some reason my crystal ball isn’t working and there is something in your particular life that I don’t know about, yet it is important, gather that too.

The reason why you should have this information handy when filling out your personal financial statement is to log in the account balances, account numbers, VIN numbers and serial numbers immediately without

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procrastination. Think of it this way. If by unfortunate circumstances you were to leave this great earth, do you think that this hour of inconvenience to put the correct information on your financial statement would be more difficult for you, or for the spouse or children who are grieving and trying to deal with items that they may have no clue about?

Now you will need to pull out the CD that came with this book. Insert your CD into the correct CD drive on your computer. Just as for the budgeting steps, open the file “Personal Financial Statement” and save it to your “C” drive so that you have the main file on your computer system.

The first step that you need to remember when creating your personal financial statement is not to type over the light blue boxes in the spreadsheet. I created the spreadsheets to calculate the values for you. In doing this, the softest color that was pleasing to the eye was light blue. Any box with a light blue color has a calculated value. If you accidentally type over a calculated field, see the instructions in Chapter 7. If you are an Excel® expert, just fix it and move on.

I have tried to make this spreadsheet as easy as possible. The next page shows the first page of Joe’s completed personal financial statement. A

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sample copy is included on your CD. Open up Joe’s personal financial statement from the CD so that you can familiarize yourself with the layout, columns and tabs. It is best to play around in the sample file on the CD because you can not save over a CD file when it is already burned.

Joe’s personal information including his wife Joanne.

All of these blue boxes contain created values. Do not type here. The dark gray boxes include a description for each section or row. The white boxes in a given row are where you will type.

This area tells you what section to complete in order for the spreadsheet to add the total asset for this line item.

This is where you can type in dollar values and descriptions on your spreadsheet. The columns and rows that are white were made just for you.

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The first column which is below Joe’s personal information is a total listing of his assets. Each row explains which assets are included in this section.

It also tells you what section to complete.

Once you have

completed a specific section, your spreadsheet will bring the total amount of the asset up to the correct asset line for you. Let’s look at the first asset account which is “cash on hand and in banks.” Liabilities

Assets

Cash on hand and in banks

Cash on hand and in banks is specifically for your “petty cash” and your “checking” accounts.

Underneath the asset description you will see

“Complete Section 9”. Scroll down Joe’s spreadsheets to Section 9. Notice that Section 10, just below Section 9, is for savings information. You do not put your savings account information such as money markets, trusts and CD’s into Section 9.

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Checking and cash information goes here.

Savings, CD’s and money markets go here.

Joe pulled out his handy checkbook and the most current bank statement he had received. In the first row he typed in his bank account name. If you have the location of the branch, type that in too, especially if you use a small privately owned bank.

The next column is the actual account

number. In the following column Joe typed in the actual balance on the day that he created his financial report. The best place to find your current account balance is from your checkbook (unless you don’t keep track of the checks and deposits!). If you obtain the balance from the prior month’s statement, or from viewing your account online, it will not show the most realistic balance because there are transactions that have not cleared the bank yet. If you are one of those people who think you have $3,000 in your bank account because that is what it said after you pulled $40 out of the ATM machine, you need to QUIT doing that! That is how people constantly become overdrawn. They never take into consideration the checks that they wrote the day before. Just because you think you have a

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few days of “float” time, it doesn’t work that way anymore. Most checks clear the bank the day they are posted to your account. If you wrote a check on a Monday and the vendor received your check on Wednesday, the money is gone Wednesday! Take a look at some of the statements that you receive from your cable company, phone company and even some insurance companies. They now list on the statement that by submitting a check for payment, you are authorizing them to immediately withdraw the money from your bank account. The check no longer goes to the bank and sits there until someone processes it at the end of the day. The cool new thing for them is EFT check processing. They have the ability to scan the check in upon receipt, and the bank immediately withdraws the money from your account. This means, no more “float” time.

The next column is the date you retrieved this balance. This will give the person reviewing your personal financial report an actual date to compare to the balance they receive when filling out an account verification form. The next column is the account type. The final column is “Signatory.” This column states who has legal authority to sign on this account. If you are creating a column for “Cash” because you hold a substantial amount in a safe, you can enter it in the next row of Section 9.

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Notice my total for “Cash” equals the same amount on the first page, and it is also in BLUE.

We have reviewed our first and second items in the “Asset” section. Now we will move on to the next asset which is Section 11, IRA & Other Retirement Accounts.

Section 11: Joe is such a big spender on E*Trade….

Joe purchased a last minute Roth IRA in hopes to save a little bit of income tax on his personal tax return. He likes to do the trading himself, so he chooses his investments through E*Trade. He is not a big stock market guy and prefers to use his money for his own business which is a huge investment in itself!

The data on the IRA is similar to a bank

account. It is a liquid account even though the value could decrease or increase depending on the market return. His E*Trade account holds only a Roth IRA valued at $2,500 which is the amount of the initial investment. You can obtain current account values on your investment accounts by either contacting your broker, waiting for your monthly, quarterly or

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annual statement, or logging in to your account online. Your account balances for all cash accounts can be consistently updated on a monthly basis without re-inventing the wheel. Any time you update a balance in a section, it will change your total assets and liabilities on page one.

The next asset up for bid is Joe’s life insurance policy, Section 8. Be descriptive about the type of policy, beneficiary and account number.

Your face value is what the policy carrier would pay upon death.

Joe purchased “Term” policies because he did not agree with borrowing his own money back on a whole life policy. He would rather be in control of that extra $500 per month they charge to a “savings” account that you can’t access without getting penalized. Going back to the first section on the front page, Joe’s total life insurance is valued at $2,125,000 which includes himself and his wife. Notice that the total amount above in Section 8 matches the total life insurance on the first page.

Should

anything happen to either Joe or his wife Joanne, the account and beneficiary information is available on the financial statement without

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trying to search and destroy records to cover a funeral. On section 8, Joe listed the insurance company name, telephone number, face value amount, annual premium, type of policy, when the term started, and who the policy is written on.

The next asset listed on our personal financial statement is for Stocks, Bonds and Business Investments, which is Section 3.

Like I said before, Joe is not a big spender on stocks therefore his bankroll is his own business. He did purchase 1,000 shares of stock for Cool Stocks.com. They were purchased at $4 per share and increased to $5 per share. His total stock value to date is $5,000. If you look at the Cool Stocks.com row, it lists the total shares purchased, the total cost to purchase, current market value, the total profit value of current stock and the account number. The next row is Joe’s web design business. The past three years have been up and down for Joe. Self-employment takes a great deal of dedication and discipline. Joe has finally built a business that has a consistent cash flow and customer base.

He hired an independent

business appraiser to come in and put a value together on his little 113

business. After reviewing Joe’s financial reports, current customer base, business assets and liabilities, he appraised Joe’s business at $150,000. This is the dollar figure which Joe’s appraiser feels that Joe could sell his company for if he so chooses. Because this is also an asset, Joe includes this as part of his “Business Investments.” The following page which includes Sections 2 through 7 will show Joe’s business investment account.

I hate wasting this much room, but the template wouldn’t fit.

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Joe and Joanne’s current credit card debt. This is part of your liability section.

Joe’s appraised business value.

Joe and Joanne’s current real estate owned. These assets also include the loan balance and monthly payment amount. The amount due is transferred to the Liability section.

Joe and Joanne’s current autos owned. These assets also include the loan balance and monthly payment amount. The amount due is transferred to the Liability section.

Other assets are typed in on a separate spreadsheet. At the bottom of your Excel® screen, the tab market “ASSETS.”

Your real estate property taxes and personal income tax liabilities are entered here. This section (7) is part of your liabilities.

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The next asset on our list is Real Estate, which is entered in Section 4.

The first and second mortgage including a HELOC are included in the same property section.

If you own a lot of real estate and need to insert your rows yet don’t know how, before you continue go to Chapter 7 to see how to inset a row without losing your values. If you notice, on Joe’s real estate his main residence is the first one listed. He’s included the physical address of the property, the name of the lender, the original cost of the home, the present appraised or market value, the current mortgage balance, the monthly payment amount and the account number. Joe has a HELOC (home equity line of credit) on his main residence in the amount of $100,000. He has tapped into the entire amount because Joanne wanted to remodel the house, and Joe used a portion for his business. Look at the entry for Joe’s mortgage. One row under the “Name & Add of Lender” says “Mortgage Bank,” and the row directly beneath it says “Home Equity LOC.” Follow the total debt over to your right to view the amount of debt due. Because the original cost of the house is a reflection of the current first mortgage, the cost and present

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value is entered in on the “Mortgage Bank” row. The “Home Equity LOC” is entered below the mortgage balance of the first mortgage, showing a total due of $100,000. The next column is the “Mo Payment” column which shows the amount you pay each month for your first mortgage, and in the following row shows the monthly payment for your equity line of credit. Because both notes are tied to one piece of real estate, the notes are included within the same address information.

Joe also has a rental

property. He purchased it for $275,900 and it is now worth $350,000. Joe makes sure he includes this information and earmarks it because he should be receiving rental income which will affect his income source.

Section 5 is for Joe’s Automobiles and Equipment.

This part could be tricky if you have a vehicle that you listed as an asset for your business. In this scenario, your business is taking the depreciation on the vehicle, and is making the note payment as well. If this is the case, do

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not include any “business vehicle” in this section. If you are taking the standard mileage deduction on your Schedule C tax return, then the vehicle is still your personal asset. In this case you would enter it on Section 5. Because vehicles lose their value very quickly, you can go online to www.kellybluebook.com to obtain a current value for yours. Joe has a motor home, his wife’s Toyota Camry, a few quads because apparently he likes to go to the desert, and a Honda dirt bike. Under the description, Joe types in the year, make and model of the vehicle. I don’t know enough about dirt bikes or quads to get into the nitty gritty detail because I don’t go to the desert, but work with me here…. When entering in your toys with engines, make sure you include the year, make and model along with the serial number if it does not have a license plate. This way there will not be any question as to which auto you are entering on your statement. If you still have an outstanding note due on the vehicle, include the current loan balance and the monthly payment due. This section will transfer your total liability and monthly payment to the correct liability section of your financial statement.

Our final asset line is for Section 6, other assets and personal property.

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All of the amounts are blue because these totals come from the “Assets” spreadsheet.

In your personal financial statement Excel® file, you will see two tabs at the bottom of the spreadsheet.

One says “Personal Financial Stmnt–

SAMPLE,” and the tab directly to the right says “Assets–SAMPLE.” If you are having a hard time finding the folder, the template will direct you to the right place.

Your Assets Sample Template. Click on the tab to go to the Assets spreadsheet.

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If you click on the tab that says “Assets–SAMPLE” it will take you to the other spreadsheet in this file. This is where you are going to enter in your other assets.

If you notice on the personal financial statement

spreadsheet, in Section 6, the entire section is highlighted in light blue. This is because your values will be carried over from your assets spreadsheet, and NOT entered in Section 6 of the personal financial statement.

When entering in your other personal assets, remember one key factor. What you paid for the asset versus what you could sell it for are two different values. Most personal assets lose resale value as time progresses, however there are those few items that continue to hold their value pretty well. If you are big on buying antiques and you are constantly shopping values, you will have a pretty good idea on what the item will sell for. If you don’t have a clue what the value of your assets are it is not the end of the world if you put the purchase price of the item. If your intent is not to sell it, and you are not trying to inflate your personal financial worth, just log in the amount you purchased it for. Joe has a lot of stuff. I guess you could say his wife does too and because California is a community property state, the ownership is 50/50 just like the personal financial report.

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The first “Other Asset” listed in Section 6 is for jewelry.

Joe was really nice to his wife and bought her a nice collection of jewelry. She likes sparkly diamonds, so he remembers her often on anniversaries, birthdays, Valentines Day and Christmas. When entering in other assets, try to be as descriptive as possible. If you are ever in a situation where your assets go through an estate, it’s nice to make sure there isn’t any confusion.

Compare your totals for each asset column to the total on your main financial statement spreadsheet.

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Joe lists out all of the jewelry that he and his wife own, the original cost for the jewelry, present estimated value, any loan balances, monthly payments and if any a serial number. He can also list out who the particular asset is willed to so that the Trust Attorney won’t need additional information. He still owes $6,500 on the wedding ring, and the monthly payment is $275. His total jewelry costs were $21,540, yet his present value is $23,790 because diamonds are a girl’s best friend. The rows in light blue are adding the entire column together for that row. This number is then automatically transferred over to your personal financial statement, Section 6, line 1 for Jewelry.

If you notice on the next print screen

template, you will see the total Jewelry values are the same.

Joe’s jewelry assets equal the assets spreadsheet so it is bringing the values over correctly.

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As you enter in each asset listed on your assets spreadsheet, you will begin to see how much stuff you buy. This will be a telltale sign of how you spend your money. Go through the entire listing and enter in all of your assets from Jewelry, Artwork, Furnishings, China & Antiques, Exercise Equipment, Media Equipment, Tools (for Joe) and of course a nice row for miscellaneous assets that you have absolutely no clue where to put, but they’re worth something. After you enter in all of your asset information, double check the “Total Assets” on your assets spreadsheet against Section 6, total assets to make sure they balance out.

Joe’s total assets seem to balance with Section 6, total assets. Take note of the bottom row for each print screen. His total assets are $252,007, present value $256,682, loan balances $28,200 and monthly payment of

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$900. If your balances do not match, it is possible that you accidentally over-rode a value formula. Go to Chapter 7 to see how to fix this problem.

Another very important suggestion to make when creating your asset list is to also create a hard file for all of the information in this list. We all know that receipts are a pain in the butt. I can’t stand them with a passion, but unfortunately they are the only paper trail that shows what you buy. Get yourself a nice folder for each asset section. Make a photocopy (or put the original receipt in) in the file behind a printout of your asset list for that section. Separate them by type of asset so that they are easier to find. Get yourself a fireproof safe that you can stash in your closet, and file all of your important documents such as assets and this financial report inside it. This way if you ever have a major catastrophe and need to prove to the insurance companies who already took all of your money why you are claiming these assets as part of a loss, you will have proof. You should also include a photograph of each asset for that little old proving theory as well. 124

Unfortunately you are your only ally and friend. Why should anyone else believe what you say? So it is your duty to prove them wrong if they ever question you.

Now that we are finished with Joe’s assets, we can take a look at Section 1, which will include Joe’s combined family sources of income. The first income source is from Joe and Joanne, and would generally be their annual salary or hourly earnings. Joe currently has a salary of $74,500 per year with his web-design business.

Joanne has a job that pays her

$42,500 per year.

Salary or hourly annual gross income.

Investments can include distributions, dividends and other investment sources.

Do you have a rental property that is earning monthly income?

Other income sources could include royalties paid to you, 1099 income not part of your business or job, etc.

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Joe has included his K-1 distribution from his company.

These are

earnings in excess of his standard salary. In order to receive a K-1 your company must be an S-Corporation or a Partnership, and throughout the year, Joe’s profits were enough for him to take extra money out of the business as part of his distribution of profits. He doesn’t have enough in the stock department to include any significant earnings for dividends, however if you had a CD account that you consistently rolled at your bank and it yielded 4.5% with a balance of $15,000, your annual earnings would be $675.00. That would be included as part of your income resources.

If you hold any Real Estate investments in your personal name you would include the total annual income in this column.

If you had multiple

business entities, and one was a real estate company, you would include your earnings from any business resource on the investments area of Section 1.

The reason why it is important to separate business and

personal sources of income is because your business financial reports will have their own list of assets and liabilities, just like your personal financial statement. The only difference is the value of your business is part of your personal asset and has already taken into consideration all of your business assets minus your business liabilities bringing your company to its value, which is your asset. If you included any business assets or

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liabilities on this list you would be double dipping or overstating your actual financial analysis.

Joe didn’t have any other income to report, however you might have an additional income resource on the personal side, like if you helped write a song or book that you receive royalties on. It isn’t quite business because the payment comes in the form of miscellaneous income, yet it doesn’t apply to general income. Your wife or husband might have a hobby that they get paid from, or every now and then you might do a “side” job and get miscellaneous income reported at the end of the year.

Once all sources of income are entered into Section 1, your formulas will bring the totals up for you on your worksheet, giving you a combined annual total of gross income.

Joe and Joanne’s total annual income.

Once all of your assets and income are listed, we can move on to the liabilities.

If you haven’t noticed, we have already been entering in

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liabilities along the way. When you are beginning to make entries in your own personal financial statement, you will notice that every time you type in a specific section such as Section 4, real estate, you will see the mortgage balance and monthly payment total are already listed up on the liabilities section of your financial statement. A lot of the hard work has been done without you even realizing it.

The first item on our liabilities section is Accounts Payable. The following template shows all of the liability sections that you will be using. It is important when entering your liabilities to also include the monthly payment that is due.

Your personal liabilities. Each description below will go in order of liability from this section.

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The accounts payable information comes from Section 1 on the liabilities side underneath Contingent Liabilities.

A contingent liability is actually one that is hard to expect or follow such as a lawsuit, a co-signing note that went bad (your cousin defaulted on that car you co-signed for her) or a federal tax lien.

The only other

“contingent” liability that is an actual part of your personal financial statement would be the amount you pay for the life insurance policies that you are including with your assets, and the direct fees associated with your real estate rental property. These items are part of a liability at hand. Once again, the cells highlighted in light blue are going to calculate the values for you, so if you need to add a contingent liability, you can type it in the white rows.

Unless you get into a great deal of trouble, you

shouldn’t need to use all of the rows. I also didn’t want to make this financial report a mile long. If you notice on the following template, the life insurance premium amount is pulled from the total annual premium of Section 8. I went ahead and left the value calculation in that row, unlike

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the other rows where you will need to type in the source and amount. Joe had to type in his rental property management fee. Take note that the amount typed in is for the annual amount paid, not the monthly amount.

Joe didn’t have any judgments or lawsuits, so those rows are empty. Notice the total amount in “Other Liabilities” was transferred up into the “Contingent Liabilities” section in the “Other Liabilities” row.

This

amount is then transferred once again. The reason there is a separate section for “Contingent Liabilities” is to separate those “unsure” liabilities from your standard liabilities such as credit card debt, car payments and mortgages. Because this liability section includes four different contingent liabilities, once you fill out each particular contingent liability, the values

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will be transferred to the corresponding part of your total liabilities section. Double check to see if your liability entries are being transferred to the correct section above. Once you are confident that you have entered all of your contingent liabilities, you can move on to the next item.

Section 2 includes all notes payable to banks and other crediting agencies including jewelry stores, furniture stores and financial service entities such as Household Bank. In this section, Joe gathers all of his most recent credit card statements and starts entering them in.

He includes the

issuing credit card company, their mailing address, the original or open credit amount, the current balance, the monthly payment amount, what the terms are, and of course the account number. Joe likes Capital One because of the commercials.

Well, the cards work pretty good too.

Discover always gives him a cash-back bonus for every purchase so he uses that card as well. He doesn’t particularly like blue card because he had to go to the bathroom once back in 1972 so they turned him down. No worries, he has plenty of credit, and the blue card just prefers perfect credit customers which is okay.

Unfortunately for the small business

world and Joe, that’s not the real world. The next template is going to show Joe’s current notes payable and bank debt.

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Notice that his available credit is $73,500 however he is only borrowing $34,857 of it.

His total monthly payment to creditors excluding his

mortgage and auto payment is $1,197. Also note that additional notes due from Section 6 “Other Assets” do not flow through to this chart. The reason why is because each asset purchase that you make could have been on any particular credit card, therefore it would too difficult to split out what portion of your revolving credit card debt was for a quad, and what was for dinner. Just like Joe did here, you will also need to type in your additional notes payable. See how he included Jewelry Credit, Furniture Credit and Best Buy? They are part of his “other assets” but the revolving debt needs to be entered here as well. If you review Section 6 you will see that these numbers will match what is listed there. You should also be able to tell if you are missing something. It is important that you don’t forget to include the other debt sources because they are part of your total

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liability and of your debt to income ratio which we will discuss later. Look at the current total amount of debt at $34,857 and the total monthly debt payment of $1,197. Double check your spreadsheet by comparing that to your liabilities section, line 2 which is your total notes payable to banks and others.

If you look at the template below, and review the CD

spreadsheet, you can see that the numbers for Joe’s note debts match.

Joe’s total from Section 2.

Most people are very mentally aware of their current income and debt. They just choose to ignore it therefore it is not a problem until the end. That isn’t the smart way to do business. If you are not constantly aware of your current financial position, both business and personal, then it is going to be more difficult for you to succeed. As you are getting used to 133

Joe’s personal financial life, you can begin to get comfortable with your own.

Joe’s next section is installment accounts from Section 5.

These are your auto accounts. If you already entered in your autos as assets and had any notes on your vehicles, you should have a total debt and a monthly payment amount in this section already. This is where the template should be doing a lot of the work while you don’t know it. If you don’t have any auto notes, and own your vehicles free and clear, way to go!

The next section is for a note on life insurance, Section 8.

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This is the insurance that I don’t agree with. It is generally called a “Whole Life” policy. I don’t care what insurance broker tries to sell you this one. I have a hard time stomaching it. Why on God’s green earth would you give your money to someone to save for 30 years (a large chunk at that) and then turn around and borrow it back from them with a penalty? Doesn’t seem very bright now does it? How odd, that almost sounds just like the social security system.... This information will be pulled from Section 8 just like with your auto notes. In Section 8 you have the opportunity to enter your life insurance assets as well as the cost for the life insurance and any “Loans” that you borrowed against it. You are better off drilling a hole in your garage floor and placing a fireproof safe in it. Stick that same $500 per month in your safe and at least the money is still yours. The only downfall is the “tax deferred” savings. But then again, what do you think the taxes will be in 30 years when you need it? If you have one of those life insurance loan payments, I’m really sorry. That is why they call it an opinion and my opinion is to steer clear of this type of product. Make sure that your loan balance on your life insurance policy flows through to your liabilities section of the spreadsheet as before. Joe doesn’t have one, so we move on.

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Our Mortgage and Real Estate notes are also entered in upon setting up our assets in Section 4.

Joe has a first mortgage, second mortgage or home equity line of credit and a third mortgage on a rental property. Because he has two different properties we make sure they are listed separately. The total amount of his mortgage balance is calculated and transferred to the liabilities section for mortgage and real estate. All these totals should include any type of note you have on your residence. Even if your father-in-law gave you $50,000 to purchase your property and you are paying him back, he is still a secured lender on your residence. He could and probably did go down to the county and file a lien against the property placing him second in line at the time he gave you the money. If you were trying to refinance your house and the title company was pulling title, they would see this debt tied to your house. You would not be able to refinance until it was paid off. In most cases like this, the borrower will request funds at closing that will pay

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off any additional lien holders. That is the purpose of the lien, to make sure they get their money back without you going bad on the loan.

The last fun one is Section 7, Joe’s unpaid taxes. These taxes do not include any federal or state tax liens. Those are considered contingent liabilities. Your unpaid taxes consist of real estate taxes and quarterly or self-employment taxes. Both Federal and State if appropriate.

Joe’s annual real estate taxes are separated by each property. His main residence has an annual tax liability of $7,500 and a monthly amount of $625. If your mortgage lender holds your property tax payment in an impound account and you have included that amount in your monthly mortgage payment, you need to reduce your monthly mortgage payment by the actual monthly impound amount of your property tax. That will give you an accurate figure for what your mortgage debt is versus what your real estate taxes are. Because Joe has a rental property, he needs to include those real estate taxes in Section 7 as well. The other fun tax is your quarterly federal and state or self-employment tax.

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complete the chapter on personal and business taxes, you can come back to your personal financial statement and change the amount to signify the correct estimated payment. If you are shooting in the dark and trying to guess, use your prior year’s estimated tax payments as a temporary guide to filling in this amount.

Now let’s take one final look at Joe’s asset and liability section of his personal financial statement. You are now going to learn how to read and understand the breakdown the way a lender would.

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If I look at Joe’s asset and liability information, I would first look at how much cash he has.

A little low on available cash.

Life insurance is heavy.

The majority is going into his Real Estate.

They buy a lot of stuff.

Joe’s “Total” assets include the totals for each section.

Joe and Joanne’s total monthly income.

I look at all of his liquid accounts that would pay off or withdraw should unforeseen circumstances arise. These would be the first three line items underneath his assets. I notice that he doesn’t have a whole heck of a lot of cash to throw around. He is heavily insured in case he or Joanne should pass, but that only covers the what ifs. It is a good what if, but I would need to see where else he has any sizeable equity. He has put a lot of money into his business which gives him a good estimated value for resale,

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but the majority of his saleable assets are in real estate. He has quite a bit listed in vehicles and other assets as well, but they do not hold their value as well as real estate. I would then take a look at their total monthly income. This number is pulled from their total annual income and divided by twelve months.

Because each line item on the first page of your

financial statement is just a number on a piece of paper, I want to see how you came up with that number. That is where I will dissect each section that you fill out. Does each section include account numbers, addresses, asset descriptions, serial or VIN numbers? This is where the more detail you include when you describe your assets, the more validity with the person reviewing the statement.

You are telling a story about your

financial worth, and you are filling in the blanks so the reader doesn’t have to make up the plot. Joe’s total assets are valued at $3,874,164. Sounds really good on paper, but wait until I pick it apart in the liabilities section. I can see that Joe and his wife earn an average of $16,325 per month and over the course of previous years, they did spend their earnings on personal assets such as jewelry, furniture, cars, entertainment vehicles and real estate. They also used their money to invest in Joe’s business. At least they have something to show for it rather than going on serious spending sprees without anything tangible after they’re done.

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Next I take a look at Joe’s total liabilities. He owes a lot in installment loans such as his motor home and the Camry for his wife.

Joe’s liability accounts payable is relatively low. It looks as though he has a lot of credit card debt. His installment accounts are pretty high. We all know you can’t get a 700 square foot house for under $800k anymore…..

Then there are the lovely taxes…. But his total liabilities are low compared to his assets right?

His total monthly debt is only $9,268 out of $16,325

You think it looks good because his net worth is almost three million dollars.

I start to put together a spending habit, noticing that Joe and his family like to buy things. They don’t buy them with their own money, instead they borrow the money from other sources to buy it and pay it down monthly. I would like to see bigger chunks going towards their principal balances, and not the minimum payment due.

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This all looks well and good, and like a true happy ending, but wait…. In the real world, his net worth is only accurate if he’s dead. Sorry Joe, but right now you are worth more dead than alive. Because the life insurance policy is payable upon death, even though it is part of your net worth, the paper pushers of the world will take it out to see what your actual net worth is while you are alive. That is the way they like you, breathing and kicking. Joe’s actual net worth is $802,792 ($2,927,792 minus $2,125,000 = $802,792). Still not bad, but he hasn’t broke a million yet. Give him a few more years and advise him to spend wisely, and he will make it.

The very bottom portion of the financial statement has an area for your signature, date and social security number so that the requestor can pull a credit report to confirm what you are saying is accurate and to see how you pay your bills.

If you notice on Joe’s, there is a section right above in the gray box that says “Current Debt to Income Ratio.” The number for Joe’s is 57%. This 142

number represents how much you spend on your debt per month, against how much income you earn per month. This is why you were including your annual and monthly income and liabilities on your financial statement. The value in this cell calculated what Joe’s current “debt ratio” is against his monthly income and monthly liabilities. Most lenders look for a debt ratio to be no more than 38%. Joe’s debt ratio is too high. This means that out of 100% of Joe’s income, he only has 43% (100 – 57 = 43) left over for general living expenses, unforeseen circumstances, or to save, play with or invest. Joe’s debt ratio is almost 20% higher than what lenders will even look at. I recognized his excessive debt in reviewing their installment accounts and credit cards from the first page of the financial statement. They are over-extended with notes and credit due. In order for Joe and Joanne to be at a reasonable debt ratio, they would need to considerably start to pay down their debt. In doing this they should focus on the debt with the highest interest rate and get rid of that one first. Then move to the next debt with the next highest rate. People like to play the “who’s got the best credit card balance transfer rate” game. This is a good game if you stick to your goal, otherwise it could bite you in the butt. If credit card X gave you a rate of 1.9% to transfer your balance for 12 months, and your available credit was $5,000, yet credit card Y had a balance due of $4,900 and their interest rate was 19%, you are going to

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want to do the most cost-saving plan in transferring your balance, but make absolutely sure that the time allotted for the interest rate is worth it, and that you don’t feel like it is a free ticket to charge up another $5,000 because the credit card is “paid off.” At this assumption, Joe would save $837 in interest per year, however there is generally a balance transfer fee of 5% of the amount or up to $50 with most creditors. This would then cost an additional $50, so in this scenario it would be worth it. Joe could save $787 by transferring a balance. The best bet would be to put that $787 towards your principal. You need to also make sure that the fee for this transfer isn’t going to put you over your limit because you will get hefty over-limit fees and interest charges. Discover Card is big on shortterm balance transfers. While they are beneficial if you can pay another card down in that time, the “fee” for transferring the card sometimes amounts to the same amount as the interest rate for the other card. Then that is where the game starts. Can you pay Discover off before the real interest rate of 18% hits in six months with another credit card that sent you a balance transfer rate of 5.9%? Let the games begin! By the time you are finished transferring balances, you come to realize you don’t know which card has what and who’s coming up with the rate expiration date and you’re in a panic because you think that card has an interest rate of 24%. Plus during all this time, you realized that transferring balances back

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and forth cost you over $300 in balance transfer fees. If the balance transfer interest rate is going to last at least 12 months, then it is worth it to save up to 20% in interest on your debt. If not, try to budget and chunk your payments to lower your debt.

When lenders are figuring your debt ratio to purchase a home, for instance, they do exclude certain items that are included on this type of personal financial statement. Generally a bank or mortgage lender is just going to look at your secured and unsecured debt such as mortgages, auto loans, signature loans, equity and credit lines and credit cards. On Joe’s personal income statement his monthly liabilities is also including his life insurance payments and estimated self employment taxes.

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Remember, this is Joe’s term life insurance payment.

$542 is Joe’s estimated employment taxes due.

Joe’s new monthly payment is $8,646.

If I remove the $80 per month and the $542 per month from Joe’s monthly payments, his actual secured and unsecured monthly debt is now $8,646. The bank would look at Joe’s debt ratio by taking this monthly debt of $8,646 divided by his gross monthly income of $16,325, giving the bank a ratio of 53%. At 53%, Joe’s debt ratio is still really high in a lender’s eyes. In order for Joe to look good on paper, he would need to cut out about $2,932 of monthly debt. To come to this conclusion, take your total monthly income, multiply it by 35% which is an average acceptable debt ratio, and it will give you 35% of your gross income. For example, Joe’s gross monthly income of $16,325 x 35% = $5,713.

His current

monthly debt is $8,646, so you would subtract your ratio total ($8,646 –

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5,713 = $2,932) to come up with the excess debt. At least you can see what goal you need to strive for. Now you get to go through your liabilities and start eating away at that debt. What would you need to pay off in order to reach this goal? Joe’s credit card debt is at $1,197, and his auto loan debts are $1,683. Those debts in themselves at $2,880 added together almost equal his excess debt of $2,932. If Joe consistently earned his $16,325 per month and paid his liability debt of $9,268 (this includes his taxes because he owes them) he should have $7,057 left for his allotted budget expenses such as food, water, utilities, gas and life in general. He should be able to set aside a budgeted percentage to pay down that debt. Keep in mind that $2,932 per month sounds small in comparison to what he is trying to pay down. As you have learned from the budgeting and cash flow forecasting chapters, paying down debt isn’t just making the minimum payment. They’re going to tack on monthly interest charges so the principal doesn’t seem to drop that easily. That $2,932 is equivalent to $34,857 in credit card debt and $102,600 worth of motor home and auto debt. That is a combined total of $137,457, which is costing Joe $2,932 per month in interest and minimal principal. How long do you think it would take Joe to pay that down, and how much do you think the extra principal payment would be per month? It depends on several factors. The biggest factor is what is the current interest rate on all of that debt? The next factor is how

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much excess are you applying to the principal? The extra principal will not only reduce the balance due, it will also reduce the monthly interest charged to the balance due. There are several websites online that have mortgage and loan calculators. You can get a good amortization calculator on www.bankrate.com. I can get an average on the interest rate for all of Joe’s debt by adding up the interest rates for each debt, and dividing the total by the number of debts.

Joe is trying to pay down 8 different

creditors to whom he owes a total $137,457. Let’s say that between these 8 creditors Joe’s average interest rate is 12%. At a five-year goal to pay this off, his monthly payment would be $3,045 per month. The interest on average is costing Joe $16,494 per year. That is a big chunk of change, and the overall cost of interest is going to be roughly $45,243 in five years at 12% per year. He has to literally double the payment in order to make any difference in the debt balance.

Now that Joe and Joanne have a true picture of their personal net worth, they can update it at the click of a button. Circumstances consistently change, but if you have the format available, it won’t be so difficult to update yours.

Also make sure that you use your personal financial

statement as a tool to show you what you do with your finances. What better way to see what you have accomplished.

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Chapter 5 Business and Personal Taxes Here is the question of the day. Are you happy when you get a refund back at the end of the tax year? Do you feel like you have accomplished the impossible and now have this free money? If the average American tax refund is $2,400 excluding the earned income credit refund, do Americans really like to lend their money to the IRS interest free for a year? Apparently so! But God forbid you are a day late and a dollar short on your tax return, and the penalties and interest start compounding immediately. Most small businesses generally do not get a tax refund unless the spouse is working and receives a paycheck from an employer. This normally happens when the spouse has excessive federal and state withholding taken out, or doesn’t claim any dependents when they really have three. The fear instilled in our heads of not paying enough is way too stressful. Who would even consider breaking even—not owing or getting a refund? Just for the sake of argument, the average interest rate for a sixmonth CD is currently 2%. Let’s take that same $2,400 tax refund and stick it in a six-month CD. Halfway through the year, your CD is going to mature with an extra $48.00 in it. Let’s roll it over again into another sixmonth CD and at the end of the year it is now $2,496.96. Wow, that feels pretty good, doesn’t it? And you don’t think the IRS is doing the same 149

thing with your money? Where in the world do you think a savings bond comes from anyway? The government of course! How many millions of Americans receive a refund each and every year, and how many millions of dollars in free interest-earning revenue is the government receiving on that money each year? So, let’s start our estimating tax lesson with this in mind!

Estimating your taxes is a lot like creating a cash flow projection. You are projecting into your future what you think your company’s net profit will be at the end of the year. It is best to have an actual profit and loss report, but most new small businesses will not have one this early in the game. So we will take Joe’s first-year cash flow projection and start estimating his income taxes for the current year. Taxes are calculated based upon tax brackets. The more you make, the more they take—unless you have a really good tax attorney who knows strategic tax planning. The following page is a simple tax table to follow in trying to figure out what it is that you might owe at the end of the year. Each state has its different regulations on tax requirements, and because I can not fit every state into this book, it is best to check with your local state on your current tax rates. I will, however, include an average for state liability as well. These numbers are assumptions and do not include itemized deductions, child tax credits or

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the earned income credit.

It is completely based upon your business

earnings, self-employment tax liability and federal tax liability.

All

deductions are icing on the cake, so check with your tax advisor for your actual estimations.

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On this tax table, there are two sections with four columns. Each column is a different estimated taxable income which breaks down how much your tax liability would be in relation to your gross income. Column one— single with no dependents—shows a net income of $16,500. If this were your earnings and you could not claim any additional dependents such as a wife or kids, your tax bracket would be 19% for federal and state.

This amount is rounded up because the state liability is .0048909090909 and Fed is .182970 and my decimal is set at two, so my number is not wrong….

For the sake of argument, Joe is going to look at his current-year cash flow projection to see what his estimated earnings less his estimated expenses are. I’m going to sound like a broken record on this next part, but that is because no matter how many times you try to explain it, an owner draw is not an expense. The only way you can legally make an owner draw an expense is if you turn it into a payroll check. That includes taking out

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payroll taxes such as federal, state, FICA, Medicare, etc. Therefore, in calculating your estimated income, you must exclude your draws!

Joe’s gross income is $21,795 ($22,100 - $305 contribution), and his estimated expenses are $12,010 ($8,410 exp + loan interest $3,600). The end result showing his estimated income for the year is $9,965 ($21,795 -

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$12,010). If I look at the tax bracket, and I know Joe has two kids and a wife, he would find his percentage under Married Joint which would be 10%. This means that Joe needs to pay $966 in taxes for this tax year: ($9,965 x 10% = $966). Because it is an estimated tax, Joe would pay it quarterly, breaking it up in four payments of $242 each: ($966 / 4 = $241.50). Quarterly tax payments are due as follows: April 15th – June 15th – September 15th – January 15th To figure out your tax bracket, multiply your estimated or profitable earnings by the percentage that corresponds to your column, and that is your “estimated tax payment.” If your profits are above $58,000 per year and you have itemized deductions, do yourself a favor and hire a CPA or tax preparer to estimate your tax liability. If you are estimating your tax liability based upon an actual profit and loss report, calculate your estimated taxes on your total net profits.

If your company starts to

generate more and more revenue, I highly suggest that you revisit your estimations at least quarterly to keep on top of any significant changes.

Once you have estimated your tax liability, open your budget back up, and put it in the tax row! If you don’t have a tax row, make one. Now you will have a true idea of how much you spend and owe!

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Now that we have the fun part of estimating our income taxes marked off of our to-do list, there are some pretty important tax details that you should include in your plan as well. At the beginning of the new fiscal year, it will be time to stress out about preparing your tax returns. If you enjoy using Turbo-tax® or a similar tax software product and don’t mind the additional job, I think it is a great benefit for you as a business owner to understand how it all works and do it yourself. However if you hate taxes with a passion, as most of us do, and you don’t understand the everchanging tax laws, I would suggest that you make the business decision to have a professional do it for you. Depending on the complexity of the return, and of course where you go to file your tax returns, the cost could vary. Look at investing another $500 to upwards of $1500 to have a business tax return prepared. A Sole-Proprietor tax return, which is your personal return plus your Schedule C business, would cost you an average of $400 to prepare. If a CPA prepared this return it would cost an average of $500 to $1,000. H&R Block, Jackson Hewitt, local enrolled agents and bookkeeping services who have a license to prepare tax returns can do this for you at the lower rate, but an enrolled agent and a CPA are the only ones that could represent you should you become involved in an audit. A corporate tax return, partnership or LLC return will cost you an average of $750 just for that return alone. That won’t include your personal tax

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return too. The more complex, the more forms to file, the more assets you have, the more money it costs to prepare. A good CPA, enrolled agent or licensed tax preparer will save you the cost of preparing your returns in missed “legal” deductions and strategic tax planning, because these professionals are required to continue their education on tax laws on an annual basis.

The next stressful but necessary item is to understand certain tax and accounting rules. Even though in the short term it will frustrate you because the rules seem really stupid and unfair, that is the way it is, and unless you can go straight to Congress and try to pass changes yourself, we unfortunately have to just live with it. The most common mistake the small business owner makes is to think that their “tax write-offs” will reduce their tax liability to zero. So many times they forget that selfemployment tax is the biggest tax liability a sole proprietor will have to pay. Instead of having your employer deducting your withholdings from your paycheck, you are now responsible for putting aside those withholdings so that you’re not sandbagged with a major tax bill that is all of a sudden due at the end of the tax year. The IRS and your state will require you to make payment of your quarterly taxes. The first year that you start your business, the IRS and some states will give you a one-time

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allowance should you underpay your estimated taxes based upon the actual amount that is due on your completed tax return. The reason why they will give an allowance for this is that your guess is as good as theirs on what your business will earn the first year. The second year, they will penalize you until they are blue in the face, and trust me, they get really blue. If you have a good CPA or tax preparer, they can estimate your annual earnings and give you an assumption on what your quarterly tax payments need to be so you won’t get penalized. It is best to estimate your taxes based upon actual financial reports. If you are not using any type of bookkeeping software to help with your business bookkeeping, try to work into your budget an extra allowance for a bookkeeping service. If you don’t have a lot of activity, you can have your bookkeeping service prepare your financial reports on a quarterly or semi-annual basis. At this point, you will have your financial reports, know where your business is at, and be able to prepare for the tax consequences without any additional surprises. It is worth the investment.

The hardest part about self-employment is socking money away into a savings or money market account and not touching it so you can pay your quarterly taxes. It is especially difficult when you have vendors or subcontractors who need to get paid and your cash flow has been slow.

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Unfortunately that tax man is a bill too, just another vendor waiting in line for their payment. One of the best ways to save for that tax payment is the “out of sight, out of mind” theory. Each time you receive a customer payment and make the deposit for the day, calculate at least 8% of the total deposit and transfer it over to a business money market account or savings account. If you had a deposit of $1,000 for the day, transfer $80 over, out of site, out of mind. After three months of deposits, your savings balance will be able to cover your tax liability without causing a major cash flow issue.

The other common questions and misconceptions that the small business owner has are concern over just what is deductible, versus what is wishful thinking. 9 Owner Draw – No matter how many times I try to explain in layman’s terms why a draw is not an expense, there is still that blank look. I believe that the client brain knows it to be true, they just don’t want to accept it. If at the end of the year your business shows a net profit of $25,000 after you have deducted all legal expenses from your income, yet throughout the year you paid yourself $24,000 worth of draws, your taxable income is not $1,000 ($25,000 - $24,000 = $1,000). Had your business not profited the

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$25,000—earned free and clear from expensess—you would have never been able to even give yourself that $24,000 in draws! The only thing that you are doing is taking your profits early. You are paying yourself a draw based upon how much you have left. So if you posted checks written to yourself into a payroll expense account and thought you were being sly, remember that you need to have payroll tax returns to back up the expense claim out of this account. If I were to review your accounting files and see this, I would unfortunately end up being the messenger and telling you that no, your profit is not $1,000, it is $25,000, and we all know what happens to the messenger! Then of course there is the angle of “What if I put myself on the payroll”? If your budget allows for this, do it. The difference between putting yourself on the payroll and collecting a draw and recording it as taxable income on your Schedule C tax return is that you pay your self-employment taxes— federal and state—immediately rather than quarterly. There really isn’t a tax break for self-employment tax versus payroll tax for the sole proprietor and this is why. Your salary for the year is $25,000 and you are now an employee and must pay your Social Security and Medicare taxes on these wages just as any other employee would.

These taxes are automatically deducted from your

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paycheck, and these amounts are 7.65%. Of the $25,000 this equals $1,912.50 in FICA and Medicare taxes. Then, your company now must “match” the FICA and Medicare tax withholdings from your paycheck at another 7.65%. Add these two rates together and they equal 15.3%. Funny, that is how much your self-employment tax rate is—15.3%. So, the bottom line is your profit is $25,000 and you owe $3,825 in self-employment tax, or your payroll wages are $25,000 and you owe $1,912.50 and your company owes $1,912.50 which makes $3,825 combined. There is no difference. The IRS will get their money no matter how you account for it. If you incorporate, you will save thousands of dollars in self-employment tax because after your appropriate payroll wage, any profits are now dividends filed on a K-1, which are not taxed with self-employment tax. 9 Self-Employment Tax – What portion of your self-employment tax is considered a deductible business expense? Just as though you are paying the payroll taxes on your employees and matching their FICA and Medicare taxes due, your “company” portion of your self-employment tax is deductible as a business expense.

That

portion is the 50% match, which is 7.65%. If you pay in your quarterly tax payments at $500 per quarter, and of that amount,

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$344 is for your self-employment tax, you can use $172 of the $344 towards your business tax expense.

This would reduce your

business profits and lower your self-employment tax for the year. So if you are doing your taxes yourself, don’t forget that you can write off 50% of your self-employment tax. In order to use this expense in the current year that it is due, you must pay the amount by the 4th quarter—January 15th of the tax year in question. If you make your payments after the close of a fiscal year, your expense will not be able to be used until the following tax year. 9 Health Insurance – At this time, a self-employed individual can claim up to 100% of their health insurance premiums as a credit, but you can’t claim it on your business tax return—Schedule C. It is deducted from an entirely different part of your personal tax return, which unfortunately does not benefit the small business owner’s net profit. It is not included as an expense for the business and is a tax credit against your federal tax liability, not the self-employment tax. It is okay to have your business pay for your health insurance premiums, but when expensing them on your financial reports, you need to separate what is your health insurance, and what is possibly your employee’s health insurance. Your CPA or tax preparer will ask you how much was yours when completing your tax return. You

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can not deduct it if your company shows a loss for the tax year or if you were qualified to receive health insurance through your spouse’s employer during the year. If you were qualified to receive health insurance for just one month in the fiscal year, then you must not include that one month’s premium in your deduction. Because this credit only applies against federal tax and not selfemployment and it upsets you as it does thousands of other small business owners, write to your Congressman to try to pass a law allowing health insurance for the owners of a small business to be a business expense!

The way it stands right now, if your health

insurance costs you $5,000 per year and you are self employed with a profit, you are paying $765 in self-employment tax—15.3%—on that $5,000 health insurance premium. Here is the real kicker, just like any other tax credit, it goes against your federal liability. Most self-employed Americans have additional itemized deductions which reduce their federal tax liability to just about zero, so the credit doesn’t do you a bit of good anyway—or if you owe a federal tax liability, it might change it by a few hundred dollars. The credit only lowers your adjusted gross income, but has nothing to do with your net income from your business, thus keeping the selfemployment tax due.

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Small business owners need this very

expensive bill to be an actual expense of the business in order to keep up with costs that seem to be drastically increasing. 9 Luxury Vehicles – In this day and age, a car costs as much as a

house used to. Unfortunately, the allowance of a nice big fat writeoff isn’t there unless you have a heavy truck over 6,000 lbs that you can use for business. Normally this works the best for the blue collar worker. The white collar worker, however, instead of pushing dirt, lumber and concrete, is pushing pencils and driving Beamers, SUVs and top-of-the-line autos. Luxury vehicles have a dollar cap on what is allowed to be depreciated. So before you run out and spend $50,000 on a cool new car, remember, your depreciation deduction is limited to the current IRS luxury dollar cap, and you can’t use the Section 179 election on it either. You can still deduct your loan interest, gas, maintenance and repairs, but make sure you keep a log book showing everywhere you went relating to business. If you are ever involved in an audit, the IRS will not allow you to use any claimed deductions without the burden of proof. 9 Travel and Entertainment – So we all like to take our clients to

lunch, golf outings, or give them tickets to a show or game; it is considered client entertainment within reason. Some of the bigger companies buy season tickets for their employees and clients, and

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they are required to meet the business deduction test and pass it in order to claim the deduction. The biggest rule is while entertaining your client, did you expect that a decision such as a contract, job, work, or revenue would be earned because of it. Unfortunately those meals are not 100% deductible, but only 50%, and they are still trying to lower that. You also can’t bring your wife or husband on your business trip and expect to write either one off unless they are a majority shareholder or they work for the company in a significant way. Las Vegas… well, if you find a really good seminar relating to your business and don’t overstay your welcome, it is deductible. But all of those thousands that you just shelled out on the craps table, well, consider that personal entertainment. The IRS doesn’t like leaving their money on the table either, and if you can’t prove that any travel or entertainment expense was fully business related, be careful on how much you try to get away with writing off into this account. The IRS goes by national averages, and if yours is significantly more than the other guys’, you have a problem. 9 Business Use of Your Home – Most of us have a home office

nowadays, but the Business Use of Your Home deduction is not as easy as one may think. You must measure the area that is used for

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your business and come up with a percentage. Most people still think that because their rent or mortgage was $2,000 per month and the utilities, trash, water and maintenance came to another $600 and they used 50% of the house for their business, then their deduction is 50% of their expense. Unfortunately, this is wrong. Almost every deduction that the IRS allows is based upon a percentage ratio adjusted against your net earnings, not a dollar figure. Just because you spend $2,600 per month, you cannot write-off $1,300. Also, be careful about depreciating your house through your Business Use of the Home deduction. When you go to sell your house, you could have an additional tax bill on capital gains. 9 Donations and Contributions – This is one of the biggest problems in the normal person’s expectation about tax deductions. Therefore, it really needs special explaining why that $3,000 donation receipt for the car you donated to the Salvation Army isn’t really worth a $3,000 deduction. First, you can only deduct the car as a donation on your Schedule A—itemized deductions form. This form is the flip side to the standard deduction, and currently this deduction for single people is $5,150, married $10,300 or head of household $7,550.

Unless you have mortgage interest, medical

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expenses, state taxes and donations that add up to more than the standard deduction, you won’t be using the Schedule A anyway and don’t qualify to file this form. Second, if your itemized deductions add up to more than a standard deduction and you can qualify to even file the Schedule A, the donation is a percentage of your net income. This is the most confusing part, and they do this for a reason, which is to continuously keep you unable to understand the ridiculous tax laws. If Joe’s net income on his personal tax return including the business’ Schedule C was $37,500, and he met the standard deduction allowance to file the Schedule A form, out of that $3,000 donation that he made it would only affect his tax liability by $465. Yes, you heard me correctly. That $3,000 car is only worth $465 in tax reduction to the IRS, and it only goes against your federal and state liability, not self-employment tax. Now depending on you and your current cash situation, you may not care about the minimal tax break that you get from a donation, and it does make you feel good to help someone else out. Otherwise, if you are having a cash flow problem and could sell that car for $1,500, you would be better off and you could donate $465 to your favorite charity.

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9 Depreciation – Depreciation is the IRS’s way of regulating how much money you can write off at one given time. It doesn’t seem right or fair to the Standard Joe, but to the IRS it’s the difference between someone’s net profit of $125,000 or $25,000 because they bought a new skip loader, which is the difference between how much the IRS can collect from you and how much they can’t. So the government came up with this ingenious idea of giving our assets life. They giveth and then they taketh away. As a quick guide, the general rule of depreciation without getting into the complexity is that you take the purchase price of an asset and write off a portion of that dollar amount over the recovery period selected by the IRS. Your asset’s life is broken down by classification such as computers, office equipment, furniture, vehicles, tools and machinery. If you have a computer that you purchased for $2,000 in January of a given year, the IRS asset life is 5 years. To depreciate your asset, you would take the $2,000 and divide it by 5, which is $400. That would be your estimated annual depreciation allowance on that asset. Don’t caught up in the illusion that just because you bought an asset for $50,000 you can take that entire $50,000 and reduce your income by that amount. It doesn’t always work that way, which brings up the next common question.

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9 Section 179 Election – The IRS does allow you to take a one-time deduction of an asset or assets purchased in the tax year which is being filed, up to $108,000. This cap does change quite a bit, so follow up with the changes through the IRS or your CPA. This is a great benefit to small business owners who need to purchase expensive equipment. The rule does not apply to luxury vehicles, as discussed before. If you have a really good CPA or tax preparer, they will only use the amount that you need for this election. There are instances where you could shoot yourself in the foot with overdoing it on the Section 179 election. It’s nice to have that big tax break because you wrote off the entire purchase price of your large asset, however what happens the next year or the year after that? If you only needed to use $25,000 of the $50,000 piece of equipment to lower your tax liability, it is worth it to have those extra five to seven years of a $5,000 depreciation expense. You are legally allowed to use all or some of the purchase price of an asset as long as it is within the cap amount.

Towards the end of the year, do yourself a huge favor and start shopping around for a good CPA, enrolled agent or tax preparer. My best suggestion is to ask your business associates, family or friends who they use and if

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they would recommend them. My clients are always more comfortable coming to me from a referral rather than calling me out of the phone book. This would give your new accountant plenty of time to get to know you and your business as well. They can review your books and see where you’re at; instead of blind-siding you with a tax bill of $14,000 due on April 15th. It makes for a much better working relationship. At the end of the year, your accountant will provide you with a list of items that they need from you in order to prepare your income tax return.

If you are not

computerized with your bookkeeping and are still doing it manually, look into investing in Microsoft Small Business Accounting® or QuickBooks®. If you need help setting up your software, both makers do have certified advisors to assist in setting up your books. You can always hire and outsourced bookkeeper to help you along the way. This option helps you maintain your accounting records, be more involved in the budgeting and cash flow numbers, and keeps you on top of your current financial position. As I said before, it is well worth the small investment.

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Chapter 6 Common Mistakes and Questions 9 Overspending When you get too big for your britches.… I see it time and time again. You would think that at some point in time common sense would kick in and the Standard Joe would make sure that enough precautions were taken to ensure the stability and future of his company. Well, in the real world it doesn’t always work that way. I hope that everyone who is working hard trying to push and crawl their way over the top of the hill does get to the other side of business and succeed. Unfortunately new problems occur when you make it to the other side of the hill. The grass isn’t always greener on the other side. It sure can be if you make absolutely certain that your business decisions are based upon thought-out plans. Too many small business owners who reach the other side, just let go. They feel like they deserve their long-overdue profit now, but I can guarantee that it won’t be smooth sailing from here on out. There is always something that comes up unexpectedly. If you forget how hard it was to get here, you could lose that unbelievable experience in an instant and feel like you’re a God. Spend, spend, spend! The spending spins completely out of control and the worst part is it is no longer spent on your business. You want a

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new boat, a plasma TV, a bigger house with lots and lots of toys. Don’t forget the parties you feel are necessary because you are rubbing elbows with all of those people who think you are “someone important” because you have a lot of cash to throw around. Tell that to your vendors six months down the road when you have spent your bankroll, the infamous October effect hits early and no one needs your product, service or business. All of those secretaries you thought you needed are now in the unemployment line because your kids wanted a rock climbing wall in your backyard. Those horses that cost you tens of thousands of dollars every month to feed, train and clean up after just for your “look at me” ego because you never ride them anyway, don’t help you a bit when the bank is calling trying to collect on the note you signed on for. The note really didn’t even have anything to do with your business, but the $350,000 motorhome sure is a beauty isn’t it?

You’re fooling yourself too if you think us accountants don’t pass judgment on you when you hire us in excess of a hundred dollars per hour to tell you how to fix it, and to let you know what you are doing wrong. Then when we tell you that you are spending money like you’re Donald Trump, yet your bank account says that you are Joe Standard, you get ticked off at us. You need to step back, look into the mirror at the person who is

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responsible, and put the brakes on. Remember how hard it was to get where you are in the first place. Before you even let yourself get to this point of “success,” tell yourself that you will be responsible with your money. Make sure you include a big old “what if” in your business plan for the rainy day that comes to all of us.

I could tell you buckets and buckets of rain in my world. Just because I’m a bean counter and budget every last penny because I’m anal, doesn’t mean that I don’t feel the ups and downs of business either. When my mom was diagnosed with lung cancer in May of 2004, I vowed to help her as much as I could. She was in Colorado, and I am in California. I flew to Colorado fifteen times in nine months to take care of her all the while my husband who is a general contractor was building our house. During those nine months, my business suffered severely because I wasn’t accepting any new projects, and my current clients knew my time had been cut shorter and shorter because of availability. Everyone who thinks that sweat equity is a cool thing, remember this: when you are only building one project which is your own house, and the project lasts for fifteen months, and as an owner builder you cannot pay yourself through a construction loan, you “float” the entire time. So during the entire time we’re building our house, my mom is dying and we are “floating” with our monthly expenses, which

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means that we needed to earn enough or have enough money stashed away to make it to the other side. We have three sets of monthly expenses. My business, my husband’s business, and our personal life as well. To throw a wrench in the entire thing, materials jumped over 40% in one month, causing the cost of building our house to be a little over $200,000 above our budget. This was after we had to have it re-engineered because we couldn’t afford the basement. That didn’t include any of our business overhead or our personal expenses including another mortgage, food, life, car payments, etc. etc. etc. So you think you have it rough, we crawled to the finish line and barely made it to the other side because we didn’t make stupid choices with what money we had left. We needed every last penny for survival! Not a plasma TV or a nice big party with hundreds of people who really don’t give a hoot about your rock climbing wall or your ego.

You can reward yourself within reason, and your hard work is worth it, but make sure that you have enough resources whether it is savings, stocks or paying down your line of credit to be able to “float” for at least twelve months. Your floating is just like mine. Include any businesses you might have and include your personal life. Imagine how difficult it would be if you were a cabinet maker, and all of your vendors cut you off, everything was COD, including what was past due, yet you had a new job coming in

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that could get you back on your feet. How are you going to pay the vendor and make them happy? How will you be able to rebuild your name and credit so that your suppliers don’t cut you off? What about payroll? It would be terrible if all of your employees walked out because their checks started bouncing. These are the unforeseen questions that you need to make sure you have an answer for. So if your profit at the end of the year is $100,000, and you actually still have the hundred thousand, figure out what reasonable reward you want to give yourself and put the rest in a money market or a CD so you have comfort in knowing it is there in case of a big old “what if.” That money is your equity. Every new fiscal year, work out your budget. Create another cash flow projection, and figure out how much of your equity you will stash for that raining day. If the raining day never comes for you, and you are able to retire when you’re young, way to go! It sure sounds nice to live for today, and do what ever you want with your money, but if you didn’t make it to tomorrow how many people have you become responsible for in the process?

You need to ask yourself what is important to you. Would you rather buy a brand new Lexus right off the lot, or would a lease return with low mileage that looks just like the new one be just fine? If the new one is going to cost you an extra $20,000 per year, is that your reward? Can you fit that in

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your budget? I had a Lexus a few years ago. It was really nice, the LX450. It drank gas like it was dying of thirst. One day at the gas station, my youngest daughter Emily who was seven at the time said, “Mom, I thought you said this was a Lexus”? I said, “Well yes, of course it is.” She then proceeded to say, “Well, if it is a Lexus like you said, then why does it say Toyota in the door?” From that moment on, I realized that the LX450 and the Land Cruiser were both Toyota-made autos, and everything else was all about image. My new image got me behind the wheel of a nice safe Volvo that gets incredible gas mileage. I didn’t need to look the part by driving the top of the line. I think the stress of the “what ifs” really changed my focus on how much is important. I looked at what I was paying in gas; it averaged out at about $900 per month in the Lexus and with the same mileage in the Volvo the gas is about $220 per month. That extra $680 per month can make a nice family vacation at the end of the year which is more important to me than paying oil companies so I can drive an impressive car. The bottom line is to try and implement your wants versus your needs, don’t live beyond your means, and keep your head out of the clouds.

9 Procrastination

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I’ll be the first to admit that I don’t like filing or credit card receipts! I put those tasks off as much as possible, then at the end of the year when tax time hits my procrastination costs me dearly. My New Years resolution every year is to not procrastinate with the things that I don’t like doing. I do have additional help with these tasks. Nice ripe kids ready for work love to help as long as they get paid.… But a lot of it I do need to do myself because most of the jobs I like to avoid are specifically related to taxes, and you know how it is when you need to do it yourself. I also know that accounting and budgeting are two of the biggest items that are on the American procrastination list. I believe the mentality is “what you don’t know won’t hurt you.” Until it is too late of course! Once you have successfully created your budget and cash flow, you really do need to set aside a few hours per month to review and update your numbers. Whether your business is already computerized with accounting software such as Microsoft Small Business Accounting® or QuickBooks®, or you are starting on a blank canvas, your budget should not be neglected. I don’t know who likes to sit down to a computer after a fifty-hour work week to go through numbers.

I’d prefer to take a nice hot bath, go

running, or walk up the hill with my girls. I know that there is a price to pay with self-employment, and that is time. Time is a very expensive commodity that is not guaranteed to anyone. I seem to find that extra

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hour needed for budgeting during business hours by writing myself and my husband in on my calendar as a client. I used to do it by going to the computer when everyone was in bed, but wives, husbands and children don’t like to be neglected so do your best to make your time available for this fun project during business hours. I am not a good early morning person, but if I was, I would probably get more done! It is best to set aside a certain day by blocking out a few hours to just get it done. You will feel much more accomplished when you do, and you will be one step ahead of everyone else who didn’t.

9 Rapid Growth Rapid growth is another crucial problem that you need to be aware of. The desire for success makes the best of us impatient. For that reason, we always strive to get there quicker. Getting there quicker isn’t always the brightest idea. There are a few things to consider when determining the financial risks of rapid growth. Most people don’t believe it is such a huge risk because more is better, right? Wrong, more could be the straw that broke the camels back. If you manufactured a product that somehow gained popularity overnight, would you have the resources to back up the sales? How quickly could you hire quality employees to make, package and ship those products?

Would your vendors increase your credit

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amount and terms to compensate for the demand or are you COD with your vendors? How would they know that your customers were even going to pay you so that they would get paid? Are your customers allowed to pay on terms or are they COD? Do you have the warehouse space to hire all of these new employees, and do you have enough in the bank or on a line of credit to cover their wages until your customers pay you? One of the most difficult parts of rapid growth is cash flow. You are now caught in the middle of juggling financial priorities to allow this inflow of growth to actually take place. The other thing that you can’t afford is to fall short with your customers or clients, because you will inevitably lose the account. The best thing you could do is to continuously progress your growth rate. Hopefully by this stage in the game your bookkeeping is set up on a computerized system and you are not living out of a shoe box. To evaluate your growth rate, take the prior month’s gross sales and divide them by the current month-end gross sales to see the percentage change. Monitor each month’s change to keep on top of the rate. Know when your current growth has reached its limit with production, finances and collections. This means that if you know your business can only handle $14,000 per month of sales with two full-time production employees, your credit limit is at $15,000 with the bank and your customers pay in about 45 days, you know your limits at that sales rate. If your sales were to

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increase to $25,000, you would need to figure out how that is going to affect your situation.

Should you require credit card payments upon

delivery so you are not carrying your receivables? Would you only need to hire one more full-time employee to cover the additional $9,000 in sales, and how much more credit would you need from your bank?

These

questions are part of your cash flow projection, and you should be able to know when they need to be addressed as time goes on. Make sure you are not caught off guard and that you have a long-term game plan for that projected growth.

9 Cash Flow Projection vs. Profitability A cash flow projection is an assumption about how much money it will cost you to operate and gradually grow every month.

Small business

owners have a difficult time understanding why they can’t use the beginning cash balance for unrelated purchases even though the cash is “budgeted” for the next month’s forecast. Look at it this way, any surplus from unexpected “ups” needs to be there to compensate for any unexpected “downs.” Because the actual cash flow can differ from the assumption but the budget still needs to be met, any earned profit will generally be applied to the difference. I realize this sounds incredibly

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confusing, but if you expected a client to pay you $10,000 and they didn’t for some unforeseen reason, now what are you going to do? Your cash flow projection included that $10,000. You need to decide on what is the most important expense to cover now that you are short. Payroll would always be on top of the list. You need to keep the employees happy or you do not have a product or service, besides the fact that not paying employees is against the law. The vendors might accept a partial payment on an invoice that is due, but you might have a finance charge which is now going to lower your profit. The domino effect of one change in your cash flow affects the overall operation of your business. You need to be able to make the best decisions to keep the business going forward.

If you are profitable and have a cash flow problem, there are two main culprits (excluding fraud). The first one is that the company’s accounting is on an accrual basis. Your customers could be stringing you out for payment on goods or services. This causes an enormous cash flow burden because you cannot produce your product to sell to your customers without paying your vendors for the materials. You can’t pay your vendors if you are not getting paid yourself. The capital contributions, notes and lines of credit are most likely being used to cover your payroll which doesn’t leave anything left to carry you. The second culprit would be a

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shareholder or owner. If you are profitable, yet can’t pay your vendors and your customers are paying on time, it would appear that your cash is going somewhere. The first place I look is to see how much money the owners are taking out for excessive distributions, toys, cars, cash and general living. If you were on a cash basis and had a profit of $130,000 at the end of the year, yet your bank accounts hold only $15,000, there is $115,000 missing somewhere. Did you buy assets? I would look at your balance sheet to see where the change occurred. If there aren’t any additional assets to account for the shortfall, the most reasonable place would be in your capital distributions account. You could only blame the person in the mirror. 9 Capital Purchases Before you attempt to make any big expenditures, you need to look at yourself the same way a bank or an investor would. Are you a big risk? Is this purchase going to increase your revenue and bottom line? How long will it take you to pay it back? How much of the capital do you have ready to put down, or will you need to finance it? What is the interest rate? On top of what you already bill, how much more income would your business need to earn to pay for this purchase? If you don’t expect much of a growth rate in sales, buying something or renovating space wouldn’t pay for itself and you would be stretching your budget. You should update 181

your cash flow projection to see if it is even feasible to afford this expense. If, for example, you use a bobcat on a jobsite more than fifteen times per year and Rebel Rents is charging you $350 per day to use it, and the bobcat is at the jobsite an average of five days each time, would it be worth it to purchase a used one, a new one, or just keep renting it? If in year one the bobcat cost you $26,250 to rent and you could buy a refurbished one for $21,000, you know in year two that bobcat would start making you money and you could probably pay it off. I hate to say it, but not everyone has the time to sit down and do a bean counter’s job—and that’s a shame, because it is so crucial to every business to know how to do just that.

9 The October Effect In every industry, demand plays a huge role in the actual sale of a product or service. Not everyone is aware of the infamous October effect. Not even I was. I am sure there are different names that might be more familiar to us, but this is what I have learned over the past few years. I noticed a serious trend in client sales specifically of products or services that are not a necessary part of every day life. In my analysis, it was obvious that sales dropped significantly the week before September 11th, and didn’t start trending upwards on a typical consistency until the first week of November. It is not unusual for sales to drop on a holiday for products or

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services that don’t relate to that specific holiday, just as the holiday products don’t peak their sales at other times throughout the year. However, this consistent drop in revenue always throws a huge wrench into the budget or cash flow of the small business. Mainly because we tend to forget it is coming and go about our merry way thinking all is well and good. On average, I saw that sales between September 1st and November 1st were dropping over 30% during these two months.

Wondering how and why this was happening, I generally thought it was because of September 11th. The world became frozen within minutes of the trade towers falling.

Most people were in such a state of shock and

disbelief that we couldn’t even fathom what had just happened. Every year on the anniversary we still tend to be glued to our TV’s watching the same footage over and over again and in an instant, we are frozen from our own fear and sadness. September 11th can account for a drastic decrease in sales during the few days before and few days after the anniversary, however the actual October effect has been going on for decades. Not knowing enough about why this occurrence was so common I asked my brother who is an engineer and owns a manufacturing company. He told me that what he found to be very probable was that because of the stock market crashes that occurred in October people tended to still fear losing

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their money. Psychologically the month became feared. This didn’t quite answer why September sales would drop so frequently as well. According to my brother’s research and theory on this subject, consumers tend to hold on to every last penny in fear of October approaching, making purchases out of absolute necessity rather than following their wants and desires.

For the business owner, this seriously hurts the bottom line. Additional promotion to convince the consumer of the need to buy was created. Halloween, brought to the United States by the Irish and British, was not notably celebrated as we know it today until 1930 when mass-produced Halloween costumes began to appear in the stores. It is this timeframe that makes you wonder. The depression that was caused by the crash of the stock market occurred in October of 1929. A year later a new tradition was born in the United States by promoting costumes and candy for children.

The mass promotion of Thanksgiving and Christmas also

became the American way. This is the most ironic part for me however I do find incredible truth in it. October is the beginning of the holiday blues. It seems to be the onset of stress, sadness, disappointment and withdrawal from social activity including spending. The sad part of it for me is that both my girls and I have birthdays in October. I happen to love it all,

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Halloween, pumpkins, Thanksgiving and Christmas, but for many people around the world these holidays are part of the October effect. What does all of this have to do with you? Unfortunately it has to do with your budgeting and cash flow projections. Once again, everything is related to money. If you don’t plan for the probability that your sales might drop by 30% during the last few months of the year, your financial expectation could cause a serious hardship on your savings, credit and ability to pay bills. If you are aware of the possibility that your business could ultimately suffer during this time, you can plan ahead and instead of hurting, you can float through the difficult time. That would be much nicer than all of a sudden freaking out because you hadn’t a clue what was going on. The best suggestion that I could make to you is to make sure you account for a possible decline in sales or revenues during this time. If you adjust your budget and cash flow from “optimistic” to “realistic” for the autumn, the estimated outcome will let you know what you need to make it through those months without getting hurt.

Planning ahead is a protective

measure that will give you stability.

9 Hiring Employees It sounds pretty cool to say, “I’ll have my secretary call you,” doesn’t it? I don’t know how many times I have seen small businesses hit rock bottom

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with their cash flow because they just had to have office staff who were really only a luxury. But I “need” someone to answer my phones. “I might miss that important phone call.” If you are a customer service business, then yes, absolutely, but if you are a contractor, mechanic, graphic designer, consultant or a vending machine operator, don’t make a catastrophic mistake by hiring prematurely! If you are so overloaded with work, and can’t even do your own accounting because you are earning money, work it into your budget. If you are so new that you don’t have cash flow or deep pockets and Susie needs a job, think of the long-term consequences before you make that important decision. Think of it this way, is it more important to make sure Susie can pay her rent for the month, or to keep the lender from foreclosing on your house because you spent all of your revenue on a secretary? Sometimes the best decision is to hire an independent contractor such as a bookkeeping service or temp service to come in once or twice a month to handle the overload of paperwork, rather than thinking there is no such invention as voice mail, e-mail or an answering machine for that matter. Payroll taxes, workers compensation, health insurance and unemployment taxes are all very real, and the IRS doesn’t like it when you don’t pay. So remember, when you are trying to dial things in, dial in your budget first!

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If you have to hire tradesmen, manufacturers or laborers to perform the work that you are charging your customers for, make sure you have their actual costs in your bid. Don’t forget what it really costs you to have employees. Just because you pay them $16 per hour, doesn’t mean that is what it costs you.

It costs you FICA, medicare, disability and

unemployment tax which can add another 10% to that $16 per hour. Workers comp is another issue all in itself, so if your laborer is above journeyman pay, your rate will be less and in construction it can be a huge loss on a job if you don’t bid the payroll correctly. Adding into account another 18% for workers compensation, this $16 employee will really cost you almost $21 per hour. If the employee makes a mistake and has to redo their work, they just cost you even more. Make sure you know how much your employees really cost you!

9 Analyzing Your Break-Even Point A break-even point is when your total revenues equal your total expenses. The most important break-even point that you need to initially concentrate on is for your product or service; this is also known as “breakeven of sales.” You will use three key pieces of information to come up with this break-even point. They are fixed costs, variable costs and sales. Your fixed costs are your consistent overhead—just like in your budget,

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you know they are going to occur each month.

They include rent,

administrative fees, office expense, office labor, etc. Your variable costs are costs that change when your sales change. For example, when you sell more products, you need to purchase more materials to make the product and your labor charges could change as well. Then you have your general sales for those products. New businesses have a difficult time finding their variable costs because they have nothing to compare the change to. This is where you really need to know how much each specific product or service is costing you by researching your numbers.

If you were selling cell

phones on E-bay, you would need to analyze your costs by the number of phones you purchased through your vendors. If you ordered 500 phones and they cost $34 per phone plus $275 in shipping, your total variable cost for those 500 phones is $17,275. If you calculated your monthly budget to be $2,200 per month in expenses, your total expenses for the year are $26,400. If you sell the phones for $149 each, how many phones do you need to sell to reach your break-even? If the total expenses equal $43,765, you would divide your total expenses by the sale price per phone of $149, which will give you the total number of phones that you need to sell to break even: $43,765 / $149 = 294 phones. As your cost of sales changes, such as purchasing a larger quantity of phones at a lower discount rate, or

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you add more employees and overhead, you must re-calculate your breakeven to be on top of the game.

Another important analysis is to know what your operating costs are per day. This will give you enormous insight into what you need to produce each day of business. In creating this assumption, the difficult part often is determining your actual cost of goods because they fluctuate based upon sales. The best solution is to find an average. If this phone business sold an average of 5 phones per day, we would know that their average cost of goods is $34 for the phone and $.55 for the freight ($275 / 500 = $.55). This gives us a total estimated cost of $172.75 per day ($34.55 x 5 = $172.75). Remember that annual expenses are $26,400? We need to divide that number by working days; do not include weekends. Since there are 52 weeks in a year, you have 260 working days annually (52 x 5 = 260). Our daily overhead expenses are $101.54 ($26,400 / 260 = $101.54) giving us a total daily operating expense of $274.29 ($101.54 + $172.75 = $284.29). Now this lucky soul knows that it will cost his business $284.29 each and every day of operation based on selling 5 phones per day. If he doesn’t sell at least 2 phones, he will be short.

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If you were trying to find a break-even point for a service industry and you billed yourself out at $80 per hour, with your overhead and expenses totaling $60,000 per year, you would need at least 750 hours worth of work ($60,000 / $80 = 750). That just is to break even. Your daily overhead would be $230.77, therefore you would need at least 2.88 hours of billable time each day to break even ($230.77 / 80 = 2.88).

Don’t forget to include your equipment depreciation! That will be the biggest error of forgetfulness when figuring your break-even. A lot of your work depends on the equipment that you purchase for the jobs, and because you have to depreciate them, the “out of site out of mind” can hurt your bidding and budgeting.

There are several websites online that have free break-even calculators that can assist you in determining your actual break-even point.

9 When to Recognize You Are in Over Your Head Unfortunately, the truth of the matter is not all businesses will succeed. Most small business owners try until every last resource is used and the only option is bankruptcy, and most notably personal bankruptcy. You need to know when you are headed towards a financial breakdown before

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it hits. No one likes to lay off employees who also have families to feed, but recognizing how larger companies reorganize their priorities will help you to understand why it is imperative to downsize as a first alternative to bankruptcy. If you have nothing to downsize and your business idea just never took off, you will need to ask yourself how long it will take you to pay back what you created. You will be damaging your credit by either filing bankruptcy or calling a credit hotline. Bankruptcies aren’t as easy to achieve as they used to be, and if you had an SBA loan or other secured loan for your business, the security would have most likely been real estate, so you need to consider that your real estate would be foreclosed on.

If you have a small business that might be top heavy on office

personnel, yet the production department is running excessive overtime to finish their work, consider looking into your administrative costs as part of the problem. It is not easy for a bean counter to admit, but, especially in the manufacturing or construction industry, it is far too common to see the amount of office staff 2 to 1 over production. Where is the common sense in this math? Unless your administrative staff is selling for you, bringing in more work and adding to the value of the business, administration is excess overhead and you need to make absolutely sure that you do not overdo it on your overhead. Administration is important, but it is too easy to have too many cooks in the kitchen. I have seen good businesses on the

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verge of folding because they hire one too many customer service, reception or secretary staff. If there isn’t more work to justify the increase in the newly added salary, then your business will cut into 100% of the company’s profit. If your company is having a struggle meeting bills and payroll, look at what portion of your expenses are not necessary and start cutting back. It sounds so terrible when we hear that a major airliner has laid off 1,500 employees, but they do it for survival, not to tick everyone off. My husband is very animated story teller who keeps me amused hours on end. Not that this story is going to be amusing by any means, but it is the same scenario as cutting back your expenses. One of his most recent stories was about the body doing anything to survive. We were watching the Discovery Channel®….

My twist is comparing it to accounting.

Imagine yourself stuck in the middle of the wilderness, dead of winter. Trying your hardest to find shelter, people, anyone who can save you. No one is around, no one willing to lend a helping hand. You are stuck in the elements where your body is now trying to fight for survival. It starts to limit the supply of blood and oxygen to your limbs because your brain and heart need it more. Now, frostbite has set in and your toes and fingers turn black, all because of your body’s need to survive. What a sad story, but it is the same thing. You are doing everything you can to make your business survive, and the first instinct is to try and find help. You need to

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be able to be honest with yourself; if you found help, say a $40,000 loan from a family member, would that just prolong the inevitable, or would you use it wisely and sparingly? Cut back the expenses that your business doesn’t need to survive, and focus on the ones that it does need. Be very careful not to fall into “just one more loan and I can get this thing working.” If your business makes money, you’re just in a slump and know you can pull yourself out, focus on important priorities.

But, if your

business makes minimal sales, you can’t seem to get the product or service off the ground no matter how hard you try and you are on the verge of bankruptcy, really consider whether or not you can come to terms with your business just not working out. Losing your toes and fingers before your heart and brain stop. It has happened to the best of us. Myself included. I have always been an entrepreneur of sorts. My mind is always going in a million directions and it is so hard to shut off what I think is a good idea. I had a multi-million dollar idea back in 1998. I thought this was it! I couldn’t possibly fail! Two years later, licking my wounds, I had lost $90,000 on an idea that never took off. I have had my accounting business since 1994, and luckily for me, this is what I am and what I am good at so I still have this business, but my other ideas, well, they were an expensive lesson learned. Now when I have that next million dollar idea, I

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look at all aspects of my successes and mistakes, because I have made them too, and I like my fingers and toes!

9 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

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even $100 extra per month towards your mortgage, you will significantly reduce the number of years on your mortgage loan.

9 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.

9 Budgeting for Inflation

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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 do 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 do it, was it worth it? Do you think that the job will bring you another job 6 months down the road that will be profitable, or do 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.

9 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

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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 9 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.

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Chapter 7 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 do 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.

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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.

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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.

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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.

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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.

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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.

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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 3 key. When you do 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.

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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.

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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

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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

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