Thursday, August 23, 2007

Creating a Budget

Do you ever daydream about new gadgets or office equipment you'd like to own if you had extra cash? Here's my what's on my wish list: a new laptop, a new printer, a new desk and a matching bookshelf to go with it. Even though I'm clearly convinced I really need all these things for my business and I'm picturing how great my home office would look if I had them, according to Padma Vaidyanathan, a CPA who offers tax advice and preparation to small businesses, I need to hold off on buying high ticket items. She advises clients to wait two years before making major purchases, or at least until they're making money. (Aaargh! Delaying gratification is not one of my strong points...). But Padma does offer an alternative: "Be creative! Try to borrow, barter, shop around, buy used. And keep in mind that it won't be forever."

Having a clear idea of what our expenses will be is also known as a budgeting (I use Quicken for this but there's also MS Money. Another good resource is MetLife's webpage on Creating a Budget). Padma gave us a tutorial on creating budgets during her visit with the Mogulettes this week (listen to a quick summary by clicking below).

She suggests starting with your fixed expenditures first. Those are items you need in order to live and ones that don't change every month, like rent, health insurance and utilities. From there it gets a little tricky because you'll need to keep tabs on how much you spend for things like entertainment, groceries, clothing, etc. Compile at least one month's data so you'll have an idea what to estimate for each category. Once you know how much you spend, you'll know how much your business has to make in order to cover your expenses.

As for startup costs (my wishlist above falls under this category) keep those separate. Figure out which ones will be one-time expenses and which will be recurring. And keep them low - we need to stay as lean and mean as possible in the beginning! (Anybody have a used laptop they'd like to donate to a good cause? See me!)

Padma's other Do's and Don'ts:

  • Don't be quick to incorporate or do a DBA ("Doing Business As"). Use your own name at first until you get a better idea of what the focus of your business will be.

  • Do open up a separate business bank account. Figure out how much you think you'll need (see above) and either "lend" yourself the money or borrow it and place it in the account.

  • Many banks won't give out corporate credit cards to startups, so another option is to designate a regular credit card only for business transactions, that way you won't go crazy looking through receipts come tax time.

  • Analyze your business expenses. Ask yourself: What's working? What's not?

  • Stay on top of collections. Use Quickbooks to invoice clients, and mark bills "due upon receipt". It's okay to charge a finance fee and/or late fee.
Did I miss anything? Please add any tips or links of your own!

1 comment:

LØVE Chocolate said...

As to's been so helpful in organizing my business expenses and income, but don't think that it's intuitive layout means you know what's going on. I did, and had to spend a day fixing all my mistakes after a visit to the accountant. I'd suggest either taking a class, reading a really good book, or consulting an accountant who's familiar with the program before you get too into entering your information.