Avoid money regrets - budget! - Finance

Home Office Computing, May, 1992 by Linda Stern

By now, you've probably passed the dreaded April 15 tax-return deadline. As you examined the year in review with your accountant, you may have thought, "If I knew then, what I know now . . ."

As in "If I knew I would spend $350 on photocopying, I would have bought my own copier." Or "If I knew I wouldn't be able to fund my retirement account in December, I wouldn't have purchased that large-screen monitor back in March."

These are the kinds of regrets a business budget can help avert. And now is the ideal time to create a budget for the remainder of the year. A blueprint that lays out what you expect to earn and what you intend to spend can help you use your hard-earned profits wisely and protect you from the kind of cash hemorrhaging that can be just as damaging to a business as it can to the family finances.

A business budget doesn't mean that you need to put cash in envelopes every month to cover rent, the phone bill, and paper clips. Instead, budgeting can consist of a few planning sessions throughout the year that let you spread out your expenses and make sure your money is going where you really want it to.

BUDGET TO GROW

A business budget can help you plan work changes, too. For instance, my friend David is a self-employed carpenter. For some time, David has been thinking about staying home more and traveling to jobs less, and has been wanting to do more fine carpentry work. He investigated the market and realized that if he bought three big pieces of equipment--a lathe, a drill press, and a band saw--he could set them up in his home shop and do more custom orders for items like cornices and moldings.

David figured that he could get the three machines he wanted for about $1,000 if he was willing to buy them used (new equipment would cost twice as much).

So David set a budget. He wanted to get the new tools quickly, so he earmarked profits from his next few jobs. He now has $1,000 sitting in his interest-bearing business-checking account, ready for the moment he finds the right tools at the right price. "I want to keep the money for those tools in my checking account, so that when I find them I can cut the check right then and there," he said. David won't spend that $1,000 on software or stationery or anything else; it's been budgeted for those business-enhancing tools.

BUDGET TO SAVE

The fact that David has the cash on hand to buy the tools means he can comparisonshop for the best deal--he doesn't have to buy from a merchant that takes American Express, say, and he doesn't have to pay interest on borrowed money. But there are other, even more direct ways that budgeting can help save money.

Take my case. Every December I try to scrape $2,000 together to deposit into my retirement account. I know this is a good idea and that I'll be glad I've done it once tax time comes along, but I never seem to plan ahead.

Last year I used my financial-calculator software--a Macintosh desk accessory called Finances DA (DiskWorld, [800] 831-2694)--to figure this out: If I deposit $2,000 every December for 30 years in a tax-deferred retirement account that averages 9 percent interest a year. I will have $272,615 to retire on in 30 years. If, on the other hand, I invest $166.66 every month into the same account, I will have $305,111 in 30 years. Same investment, same time frame.

BUDGET TIPS

Know what you spend. The first step to successful budgeting is figuring out exactly where your money goes. You should already have this data, because you need to keep expense records to file your tax return. The more details you have, the better. Analyze this information: Are you spending too much on equipment and supplies, and not enough on marketing? Did you spend a lot on repairs because you thought you couldn't afford new equipment?

Set a profit margin. Figure out, in gross terms, how much you earn and how much you spend on your business, and come up with an ideal that you think is right for you. If you are spending 95 percent of your gross income just keeping your business afloat, you are probably not budgeting for a big-enough profit (unless you own a restaurant, grocery store, or some other high-overhead business), and should look to cut costs.

If, on the other hand, you are putting only 5 percent or 10 percent of your income back into the business, you probably aren't investing enough in your company to keep it growing strong. A really rough rule of thumb for service businesses without high equipment costs might be total expenses that run 35 percent to 50 percent of gross income.

Estimate income over the coming year. This is a tough one, particularly in an uncertain economy and at the growing stages of a business. Consider how much of what you made last year will be repeat business, how much growth you expect, and whether you intend to raise your rates until you arrive at a certain figure.

Plan for anticipated expenses. My carpenter friend David knows that every year some of his tools will have to be replaced. I know roughly what I spend each year on subscriptions to publications I need to do my reporting. Figure out what your monthly spending is on all these expected expenses.