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Staying Alive: Why I Finally Decided to Make a Budget

February 13, 2013 by Leave a Comment
Staying Alive

The struggles of a business trying to survive.

I read Ami Kassar’s recent post on sloppy bookkeeping with interest because I spent so many years struggling to figure out why I was always running out of money.

I do have an excuse: I started my business a long time ago, in 1986, and many of the business tools we take for granted didn’t exist, or at least weren’t accessible to a tiny company like mine. Obviously, I had no Internet, e-mail, cellphone or Web site. It may be hard to imagine, but personal computers were just getting started, spreadsheets were primitive, and QuickBooks was years in the future. So I got off on the wrong foot, and it took me a long time to recover.

Fast forward 26 years, and I have put in place a reasonable set of accounting tools and learned to do a little spreadsheet writing. I now do my bookkeeping and accounting with QuickBooks. I calculate my pricing for custom work with Excel. And I track cash flow using Google spreadsheets. With these, I can do all of the standard accounting tricks, which mainly look backward in time at what happened to my money, and even look a little into the future to predict short-term cash flows. Until last week, though, I had never created a budget for the coming year.

I have found it to be much easier, using QuickBooks, to look backward rather than forward. Maybe this is because accounting is geared toward actual transactions and is less equipped to handle the future. Maybe it is because the conventions of accounting date back hundreds of years and just haven’t been updated to take into account the ubiquitous spreadsheet, which allows for easy modeling of future cash flows. Or maybe it is because I’m simply uneducated with regard to the accounting software I use and can’t figure out how to make QuickBooks do my bidding.

If you don’t find those excuses to be convincing, and you shouldn’t, here is a better one: I was very, very busy with selling until recently, when I handed off that responsibility to my employees. Suddenly, I find myself with time to think about things, and I’m doing projects that I should have done years ago. One of them was to try to figure out whether I would be able to afford to pay myself a decent salary this year and also hire a couple of workers. So I decided to do a budget for 2013.

I had just run a profit-and-loss report out of QuickBooks, comparing 2011 and 2012, to see how much I was spending on materials and whether there had been any surprise expenditures. It was interesting to consider the entire chart of accounts, which for my small factory has more than 100 main accounts and subaccounts. It occurred to me that it would be simple to export the current P.L.report as an Excel sheet and use the existing chart of accounts as budget line items for the following year. That way, I would not forget to include obscure yet expensive expenditures like leasehold improvement depreciation. With two years’ spending in each category, it would give me a good start toward figuring out reasonable amounts to budget for the coming year. And I could, with a little effort, convert some of the cells from straight numbers to formulas that varied with income, so that I could model alternative situations.

I’m not a spreadsheet genius, but I have learned enough to accomplish my goals: how to write simple formulas and how to make a cell in one sheet refer to a result in another. With that level of mastery, I was able to set up the budget so that the material spending varied as a percentage of revenue, with the baselines determined by averaging the previous two years. I was also able to assemble a separate sheet that had a complete model of my employee labor costs, including pay rates; forecasts of hours of regular time and overtime for each worker; the federal, state, and unemployment taxes that their wages would generate; and their retirement plan contributions.

Because this is so complicated, I have made a copy of the original — with the numbers scrambled a bit for the sake of my privacy — and posted it here. It’s a Google Doc and shows only the values of the cells, not the formulas, so I added some comments to clarify the relationship between the budget and labor sheets. Also, the chart of accounts is ours, and your results may vary. I don’t expect anyone to copy this exactly, but it will give you an idea of one way to set up a budget and make it into a forecasting model.

When I finished my budget using my real projections — including a rise in revenue to $2.4 million, a reasonable salary for myself, what I expected to pay all of my people, and expenditures for materials proportional to the rise in revenue rise — I found that I would have only $54,000 left over. That is pretty slim pickings out of $2.4 million. It wouldn’t take much of a revenue shortfall or unexpected expense to wipe it out entirely.

Of course, I could make that number jump by cutting employee salaries, or my own salary. I did budget $73,500 for some projects I expected to complete: a second Web site and some computer and machinery purchases. But I could choose not to spend that money and improve my bottom line. The most promising source of savings, though, is materials. I’ll be taking a hard look at some of those expenditures to see whether we cannot buy more efficiently.

After doing all of this, I went back to QuickBooks to take a look at the built-in budgeting tool. There is one there, but I found it disappointing. (Here is a reasonably succinct explanation of how to use it.) What it does not do is let you import the previous year’s actual spending to use as a starting point, and it also does not seem to allow you to enter formulas to make different accounts dependent on each other, which is why I much prefer using a spreadsheet. I wish that there were a simple and painless way to set a budget, but — as with so much of the financial side of running a business — there are not any shortcuts.

Getting back to Ami’s post, it covered all of the reasons to keep your books up to date. And I have nothing to add — except to say that once I started putting in the time every week to see where my money was going, I suddenly had more of it. Not always as much as I wanted, but enough to build up a decent amount of working capital over the last three years. Now, with my budget in hand, I hope to do even better in 2013.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2013/02/12/why-i-finally-decided-to-make-a-budget/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: Why I Finally Decided to Make a Budget

February 12, 2013 by Leave a Comment
Staying Alive

The struggles of a business trying to survive.

I read Ami Kassar’s recent post on sloppy bookkeeping with interest because I spent so many years struggling to figure out why I was always running out of money.

I do have an excuse: I started my business a long time ago, in 1986, and many of the business tools we take for granted didn’t exist, or at least weren’t accessible to a tiny company like mine. Obviously, I had no Internet, e-mail, cellphone or Web site. It may be hard to imagine, but personal computers were just getting started, spreadsheets were primitive, and QuickBooks was years in the future. So I got off on the wrong foot, and it took me a long time to recover.

Fast forward 26 years, and I have put in place a reasonable set of accounting tools and learned to do a little spreadsheet writing. I now do my bookkeeping and accounting with QuickBooks. I calculate my pricing for custom work with Excel. And I track cash flow using Google spreadsheets. With these, I can do all of the standard accounting tricks, which mainly look backward in time at what happened to my money, and even look a little into the future to predict short-term cash flows. Until last week, though, I had never created a budget for the coming year.

I have found it to be much easier, using QuickBooks, to look backward rather than forward. Maybe this is because accounting is geared toward actual transactions and is less equipped to handle the future. Maybe it is because the conventions of accounting date back hundreds of years and just haven’t been updated to take into account the ubiquitous spreadsheet, which allows for easy modeling of future cash flows. Or maybe it is because I’m simply uneducated with regard to the accounting software I use and can’t figure out how to make QuickBooks do my bidding.

If you don’t find those excuses to be convincing, and you shouldn’t, here is a better one: I was very, very busy with selling until recently, when I handed off that responsibility to my employees. Suddenly, I find myself with time to think about things, and I’m doing projects that I should have done years ago. One of them was to try to figure out whether I would be able to afford to pay myself a decent salary this year and also hire a couple of workers. So I decided to do a budget for 2013.

I had just run a profit-and-loss report out of QuickBooks, comparing 2011 and 2012, to see how much I was spending on materials and whether there had been any surprise expenditures. It was interesting to consider the entire chart of accounts, which for my small factory has more than 100 main accounts and subaccounts. It occurred to me that it would be simple to export the current P.L.report as an Excel sheet and use the existing chart of accounts as budget line items for the following year. That way, I would not forget to include obscure yet expensive expenditures like leasehold improvement depreciation. With two years’ spending in each category, it would give me a good start toward figuring out reasonable amounts to budget for the coming year. And I could, with a little effort, convert some of the cells from straight numbers to formulas that varied with income, so that I could model alternative situations.

I’m not a spreadsheet genius, but I have learned enough to accomplish my goals: how to write simple formulas and how to make a cell in one sheet refer to a result in another. With that level of mastery, I was able to set up the budget so that the material spending varied as a percentage of revenue, with the baselines determined by averaging the previous two years. I was also able to assemble a separate sheet that had a complete model of my employee labor costs, including pay rates; forecasts of hours of regular time and overtime for each worker; the federal, state, and unemployment taxes that their wages would generate; and their retirement plan contributions.

Because this is so complicated, I have made a copy of the original — with the numbers scrambled a bit for the sake of my privacy — and posted it here. It’s a Google Doc and shows only the values of the cells, not the formulas, so I added some comments to clarify the relationship between the budget and labor sheets. Also, the chart of accounts is ours, and your results may vary. I don’t expect anyone to copy this exactly, but it will give you an idea of one way to set up a budget and make it into a forecasting model.

When I finished my budget using my real projections — including a rise in revenue to $2.4 million, a reasonable salary for myself, what I expected to pay all of my people, and expenditures for materials proportional to the rise in revenue rise — I found that I would have only $54,000 left over. That is pretty slim pickings out of $2.4 million. It wouldn’t take much of a revenue shortfall or unexpected expense to wipe it out entirely.

Of course, I could make that number jump by cutting employee salaries, or my own salary. I did budget $73,500 for some projects I expected to complete: a second Web site and some computer and machinery purchases. But I could choose not to spend that money and improve my bottom line. The most promising source of savings, though, is materials. I’ll be taking a hard look at some of those expenditures to see whether we cannot buy more efficiently.

After doing all of this, I went back to QuickBooks to take a look at the built-in budgeting tool. There is one there, but I found it disappointing. (Here is a reasonably succinct explanation of how to use it.) What it does not do is let you import the previous year’s actual spending to use as a starting point, and it also does not seem to allow you to enter formulas to make different accounts dependent on each other, which is why I much prefer using a spreadsheet. I wish that there were a simple and painless way to set a budget, but — as with so much of the financial side of running a business — there are not any shortcuts.

Getting back to Ami’s post, it covered all of the reasons to keep your books up to date. And I have nothing to add — except to say that once I started putting in the time every week to see where my money was going, I suddenly had more of it. Not always as much as I wanted, but enough to build up a decent amount of working capital over the last three years. Now, with my budget in hand, I hope to do even better in 2013.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2013/02/12/why-i-finally-decided-to-make-a-budget/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

Mortgages: Mortgages

November 14, 2011 by Leave a Comment

But in today’s shaky economy, many financial advisers are suggesting that homeowners wait.

“I think paying off the mortgage would probably be a poor decision financially right now,” said Gibran Nicholas, the chairman and chief executive of the Certified Mortgage Planning Specialist Institute, which trains and certifies financial planners who provide mortgage and real estate equity advice.

The decision, he says, depends upon cash flow and returns.

Debra Shultz, a managing director of the Manhattan Mortgage Company, says that homeowners approaching retirement must ensure that they have enough cash flow to cover daily expenses. Once the mortgage is paid off, she noted, “you can’t take it back unless you refinance and cash out again.”

And refinancing as a retiree could be difficult. “Their qualified income might drop, which might inhibit them from refinancing and qualifying,” she said.

In some cases, homeowners might receive a better return by investing the money they would have used to retire the mortgage. “Why pay off a mortgage and save maybe 3 percent after tax when you could be putting that money into a muni bond earning 4.5 percent after tax right now?” Mr. Nicholas said.

Returns could potentially be even greater if the retiree bought a vacation or retirement home on the cheap. “I think there’s going to be fire sales and they’ll have opportunities to grab assets at fire-sale values,” said DaRayl Davis, a money manager and the author of “Economic Secrets of the New Retirement Environment” (Xlibris, 2009).

Financial advisers also contend that it makes little sense to pay off the mortgage on an asset whose value is still depreciating. Indeed, home prices in the country’s top 20 markets have fallen more than 30 percent, on average, from their peak in June 2006, with those in Las Vegas, for instance, tumbling 60 percent, according to Alex Barron, the founder and president of the Housing Research Center.

Prices in New York City are off 22 percent from their peak, he said, adding that he expected home prices to fall another 5 percent before bottoming out in the next one to two years.

Mr. Davis is even more bearish, predicting that prices could slide another 30 percent. “That bubble has burst,” he said, “and it’s not done deflating yet.”

Mr. Nicholas recommends that any homeowner with a mortgage rate above 7 percent try to refinance to a lower rate if the refinancing costs are not too high.

Then there are the tax implications of losing the mortgage deduction. These are only relevant, Ms. Shultz noted, to owners whose principal is less than two-thirds paid off. Once the two-thirds threshold has been reached, the interest deduction, if any, is small and doesn’t justify keeping the mortgage.

Of course, the good feeling of owning a home debt-free should not be minimized. “Trading off a known 4 percent interest rate for an unknown market return may leave some retirees jittery,” said Drew Denning, the vice president for retiree services of the Principal Financial Group.

For those who do opt to pay off a mortgage early — perhaps they want to eliminate debts to pay for their children’s college — the experts suggest that they have at least 12 months of living expenses in cash available outside their retirement accounts after the home is paid off. That is double the amount normally recommended in good times.

Mr. Denning recommends as much as two years’ worth of living costs. “The ability to find another job that pays a comparable amount of money is very challenging in today’s environment,” he said. “And going to your bank to take out a loan when you’re unemployed would not be one of the more friendly visits you’ll have.”

Article source: http://feeds.nytimes.com/click.phdo?i=cf4dea317a14728b70b6d40a01d16379

Filed Under: Your Money Tagged With: , ,

Small Business: Young Entrepreneur Sees Little Help in Washington

August 27, 2011 by Leave a Comment

Mr. Blumenthal said he made the trip to learn more about how the federal government viewed entrepreneurship. Like a lot of founders of start-ups, he has little interest in hiring a lobbying firm, but he is all too aware of the impact government and politics can have on business. For one thing, his New York-based company, which he says has 40 employees and produced more than $1 million in revenue in its first six months, is subject to regulations that vary widely from state to state.

The following is a condensed version of a recent conversation in which Mr. Blumenthal spoke, among other things, about what politicians don’t understand about business, what he had to promise the Small Business Administration he wouldn’t do with his borrowed money, and what the Bloomberg administration is doing right.

Q. What was it like trying to get an S.B.A. loan?

A. Finding a bank that did S.B.A.-term loans was a challenge. We were surprised that they needed two years and that banks had absolutely no flexibility. Many of the loan officers said we had a reputable business that was cash-flow positive and we had the most sophisticated business plan they’d ever seen, but they can’t provide loans to people who don’t have two years of tax returns.

Q. Isn’t that a reasonable request when you’re talking about using taxpayer dollars to guarantee a loan to a private company?

A. I understand where the banks are coming from. It probably was necessary to implement hard and fast rules to stop the bleeding when the crisis hit, but they should be looking at the policies and thinking: Does this make sense now?

Q. Was the application process difficult?

A. We had to sign so many documents that my hand hurt after I was done. I had to pledge not to open a zoo, swimming pool or aquarium. It struck me as strange. Yes, it’s the bank’s duty to do due diligence, but this was just a silly restriction.

Q. But there was a happy ending, right?

A. Yes, after being turned down by 15 banks, it was a personal relationship that introduced us to a regional bank in New Jersey that gave us a $200,000 loan.

Q. What reasons did the 15 banks give for turning you down?

A. They didn’t have the authority to bypass the rule that you have to have two years of tax returns.

Q. Was your company profitable at the time?

A. Yes, we were profitable and we had a ton of traction. We had higher customer satisfaction scores than Zappos or Apple. A rational bank should have wanted to support us, even though we were a more risky bet than a company that had been around longer.

Q. What did the bank that lent you money do differently? Did it demand collateral?

A. We came through a personal relationship at a very high level at a regional bank in New Jersey that didn’t have the draconian guidelines because their management was empowered to make decisions. For the $200,000 S.B.A.-backed loan that we got, the bank wanted $100,000 in collateral in either cash or marketable products. The reason they wanted so much collateral was that if we default, the regional bank is not going to go through the process of getting the money from the S.B.A. because it’s so onerous.

Q. What did the loan allow you to do?

A. We were able to hire 20 employees. The loan also helped us with cash flow and to purchase inventory. If we didn’t get that loan we would have had to go to the equity markets. Between the four of us co-founders, we own 90 percent of the company and that, in our opinion, is a good thing.

Q. What could Washington do to help?

A. The first is streamlining regulation. The rules of optical dispensing vary from state to state. Dispensing eyeglasses is not that complicated and even if it were complicated, there should be uniform rules. I’d also do something about the dearth of technical talent — it is really difficult to hire Web developers and engineers. We aren’t educating enough of these people. It was refreshing to hear the politicians talk about the STEM — science, technology, engineering and math — subjects, but come on, let’s get some of the smart engineers into the country by granting them their H-1B visas.

Q. Are you involved in the political process?

A. We have never met with politicians. I don’t know the first thing about how to get heard. My suspicion is that it’s to donate a lot of money.

Q. Have you had any positive experiences with government?

A. What the Bloomberg administration is doing in New York City is nothing short of amazing. They are listening and problem-solving. The typical process to get permits from the Department of Buildings takes several weeks, and if you are in a landmarked building it takes even longer. The Bloomberg administration put together the New Business Acceleration Team that helps business cut through the red tape and get those approvals faster.

Q. You mentioned that some members of Congress didn’t seem comfortable talking about technology. One senator, for example, didn’t know what a Web developer is. Do you think members of Congress should be required to go to a class to get up to speed?

A. Who would design that class? I hope not members of Congress. I was pretty surprised at the lack of mastery.

Q. Do you think the government is doing enough to encourage entrepreneurship?

A. I was recently told a statistic that the majority of entrepreneurs are foreign-born or haven’t graduated from college — which means the best and the brightest and the most educated are not pursuing entrepreneurial paths. For whatever reason, we aren’t encouraging these people to start their own business.

Q. Why do you think consumers should be encouraged to buy from young entrepreneurs?

A. I think consumers should buy whatever they want. I personally try to buy the best-quality items at the best price that do the least harm and from companies that are striving to do good — many of those companies are run by young entrepreneurs. Still, I think it would be strange to be encouraging people to buy based on people’s age rather than the strength of their product.

Q. But isn’t that the cause that brought you to Washington?

A. I came to Washington primarily to meet other entrepreneurs. That being said, I was also curious to hear how our federal government was thinking about entrepreneurship.

Q. What do you make of the economic turmoil we’ve been experiencing?

A. It highlights that it might be too much to ask Washington to help with entrepreneurship when they can’t even get the basics right, like maintaining a decent credit rating.

Q. Is your company doing anything different because of the economy?

A. We are not right now, but we do fear our ability to get working capital and debt. It’s something we are monitoring closely.

Article source: http://feeds.nytimes.com/click.phdo?i=7a54ce7a764a031d4d8cad7e91bfa8f7

Filed Under: Small Business Tagged With: , ,

Bucks: Why You Avoid Your Most Important Financial Task

July 18, 2011 by Leave a Comment

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site, BehaviorGap.com.

I’m not sure how it happened, but budgeting became a topic (along with life insurance) that people will do almost anything to avoid talking about.

I’ve had my own issues with budgeting, viewing it as something people do when they are overly focused on money or for people who have a difficult time being disciplined. For me, being put on a budget felt like a punishment, comparable to being grounded when I was little. So budgeting always seemed to land way down on my list of financial priorities.

But I was wrong.

I recently spent time with J.J. Sessions, a really good financial planner in Maple Grove, Minn., who changed my perspective on this issue. During our conversations, I asked him what excited him most about his work. For him, it’s having a massive impact on the cash flow of his clients, regardless of their income or net worth. He pointed out that managing cash flow (budgeting) is the key to his clients’ goals (and mine, too).

Financial goals get funded with dollars. Dollars tend to slip through our hands unless we have a system for plugging those holes. We can only plug those holes if we know they exist. So managing cash flow is not something that gets in the way of reaching financial goals; it’s the key to reaching them.

Successful companies understand that managing their cash flow is key. It’s not really any different for individuals. And no matter how stable your financial situation, I doubt there’s ever a time that it’s no longer helpful to manage cash flow.

So why does budgeting get pushed to the bottom of our financial priorities?

  • Budgeting requires being disciplined by setting and tracking spending goals. But being disciplined is hard, and we tend to avoid hard things.
  • Budgeting is not complex. Remember how we say that we want the simple, but still choose the complex? But it is not easy, so we keep looking for other solutions that only appear to be easier.
  • Budgeting is revealing. We talked about this last week. When we start to examine how we spend our money, we learn things about ourselves, and sometimes those things surprise us. Why did we buy that new television instead of adding money to our children’s college fund? Why did we take the trip when we knew it would take months to pay off the credit card bills? When we set a budget we have to take questions like these into account.

If you’re wondering how to get started, there’s been plenty written about ways to make budgeting easier, but here are a few of the ideas that Mr. Sessions shared with me:

Automate your fixed expenses

Automate your long-term savings goals

Track and review your discretionary spending

In the end, I’ve learned that while cash flow management might be hard no matter how much I do to make it easier, the outcome is worth it. The key to accomplishing the goals I really care about (and the goals you really care about) is to spend the time and make the effort to create a real budget. The hard work will be worth it in the end.

If you’ve had success creating and sticking to a budget, what’s worked for you? And what benefits have you experienced from committing to a budget?

Article source: http://feeds.nytimes.com/click.phdo?i=89d6062fb602768ec62d03477bee3e25

Filed Under: Your Money Tagged With: , ,