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Control Cash Flow with a BudgetCash flow control is one of the most important requirements of successful business management. Begin by questioning everything expenditure. To do that, you must examine every single expenditure. The objective is to find the justification for the money you spend. What is the purpose your financial transactions? If you don't know the purpose, you are a pocket waiting to be picked. Setting up a budget can be a painful process, but one that is vital. This pain can come from two sources: the time and effort needed to start and maintain the budget, and the financial sacrifices that may be necessary to put the budget into force. It would be nice if we could say that you'll be able to reach all of your personal financial goals without making some current sacrifices. This would be nice, but it's probably not possible for most of us. If it were so easy, everyone would have attained financial security. We all know this is not true. A budget is a tool to help you to reach your financial goals. It is intended to be an organized way to compare income and expenditures over a relatively short time frame (a week, month, or sometimes a year). It should allow you to forecast your income and expenses, monitor your progress, and make changes as needed to achieve your goals. A budget is a means to provide the structure and discipline necessary to make changes in spending habits. Most financial troubles comes from bad money habits. Read the 7 Secrets of Wealth Building. A budget should give you a detailed picture of how money comes in, and how it is spent, within a certain period of time -- usually monthly. But the monthly reporting is used to build an annual budget. Many people figure that if they closely watch and diligently control the expenditure side of the budget, the income side will take care of itself. This may be OK for individuals whose only income is derived from fixed salaries. However, individuals whose incomes vary from month to month — like most small business owners — will also want to also track income received as part of the process. As a worst case example, you obviously wouldn't want to be in the situation of thinking you are bringing in $5,000 a month (and making spending decisions on this belief), only to find out several months later that your income has been averaging $4,000 a month. And even if you never find yourself in a negative cash flow month, seeing a pattern develop where your income is falling (or not growing as fast as your personal expenses are) may give you an early warning signal that will allow you to pare down expenses before a cash crunch develops. Tracking personal income against expenses may also alert
you to happier news. If income is rising faster than
expenses, you may be able to increase personal savings, or
cut back on draconian spending limits that you have imposed
on yourself. If you haven't already organized your budget,
here's a 3-page worksheet. In that case, look at your draw over the past year, and take an average figure. You can adjust this upwards or downwards, depending on your expectations for this year's performance. Don't forget to adjust your net income figure by the amount of the taxes you'll need to pay on that income. You can determine this by looking at last year's income tax return, if you were in business last year; otherwise, check with your accountant. Also include any investment income from stocks, bonds, checking accounts, rental properties, royalties, etc. Once you've computed your income, the next step is to take a look at the expenditures side of your budget. Anyone who goes about setting up a personal financial budget usually is well aware of the importance of accounting for personal expenses. (In fact, some individuals — with varying degrees of success — create a budget without formal entries for income.) However, recognizing the need to scrupulously account for all expenditures during the reporting period that you choose (monthly, for most people), and actually doing it for long enough to do much good, can be two different matters. Unless you are the type of person who really enjoys record keeping and working with figures, the process of budgeting for expenses can be difficult and tedious. Although it may be hard to see when you start, the time you spend preparing and maintaining your personal budget can yield real financial gains. The process of budgeting for expenditures may be broken down into several steps:
When it turns out that you have paid more (or less) for an item than the amount you had budgeted, you will, of course, want to adjust the amount of the estimated budget expense to agree with the amount you actually paid. But, this may not be all that is required — other budgeted items (in either the current, or later budgets) may have to be changed. Item is more than budgeted amount: If you are dealing with a cost overrun (or unbudgeted item), you may want to consider one or more of the following:
Unlike governmental units, business owners and their families normally can't run budget deficits for any great length of time. If your personal budget shows you to be running a deficit, you'll usually need to quickly bring in more assets (by increasing income, tapping savings, or obtaining loans) or, more likely, to decrease spending on other budget items. Because a small business owner's ability to get a business loan is often dependent on his or her personal creditworthiness, it's vitally important for your business operations that you keep your personal financial house in order. If you are dealing with the situation where a budgeted item was either acquired for less than the budgeted amount, or the expenditure was not made at all, you may want to:
If it turns out that you're spending less than your income, you're among a very select group of Americans. you save at least half of the excess cash, for other times when you might have more expenses than you forecasted. While it is useful to have a hard copy (paper), computer software offers a means to automate and speed up the whole process of budgeting. You can use the software to do "what if" projections, and an PC can take the drudgery out of the number crunching. A budget is a useful stand-alone tool to help control your current finances, and it is one of the components in a long-term effort to build your personal wealth and business planning. Mvelopes Personal is an online budgeting system that makes it easy to create an effective personal budget and track every aspect of your spending as it happens. It will help you always know exactly how much you have left to spend, instantly know the impact of every spending decision, effectively manage credit card spending, and quickly create an easy to use household budgeting plan. |
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