Spending Plan: Let the Numbers Do the Talking

Successful entrepreneurs know that financial forecasts are crucial for a business of any size. The long shadow of failure awaits the enterprise that has not properly budgeted for upcoming circumstances.

When presented with the task of budgeting, many people react as if they’ve been asked to tackle a grizzly bear. But those who let reason win out over fear soon see that a budget is a tool they’re acquiring, not a burden they’re enduring.

Committing

Using weak budgeting techniques may get the job done quickly, but doesn’t really deliver any value. For example, it’s best not to waste time creating a budget that simply takes actual numbers from last year, then adds a fixed percentage adjustment and a few guesses to certain spending categories. Instead, your budget should establish the actual spending necessary to operate at peak output; remember, you can always reduce it in the future if sales don’t sustain it.

Guessing about spending doesn’t produce enough information for planning in an efficient way, and the result is cash management problems. Knowing how much your business can afford to spend is a real necessity.

Starting details

You can establish a sound budget, and assess your actual spending, by calculating the cost of each type of item in the quantity required to sustain revenue. These details then flow into a master budget where the broken-out expenditures are combined into summary categories.

If your business has only a few types of expenditures, that should make your budgeting task simple, but don’t make the mistake of going directly to the summary figures and missing the necessary interim step of figuring out the per-item costs.

Even if your business is entirely service oriented – with no purchases of inventory or parts – some of your spending still fluctuates according to sales. Among the possibilities: ever – changing costs for travel or supplies.

A budget that aligns with expectations identifies how much you must spend – and when – to achieve your sales goal.

Accurate budgeting allows you to understand where the money is going. For instance, should you need to reduce expenditures when revenue falls short of the goal, the budget presents breakdown line items to show you what items you can do without. Likewise, if you intentionally spend less on a single item, accurate budgeting quantifies the result of your action, showing you the commensurate reduction in sales revenue.

Summarizing

The master budget summarizes each expense line item. You don’t identify adjustments in these main categories; this summary gives you an overall picture of what to expect each month for the upcoming year, offering you a cohesive perspective on outlays of funds per month.

You can certainly tackle a budget yourself; however, another method is to get started with some professional help. These two methods aren’t mutually exclusive – once the budget spreadsheet is put together, updating it as ongoing events unfold is easy. Change one number in the line – item breakdown and the master figures are instantly updated.

The result: you stay informed and prepared throughout the year by letting the numbers do the talking.

How to Categorize Small Equipment Purchases  

Business property depreciation is one area that creates an incredible amount of confusion among otherwise savvy business owners. Entrepreneurs typically see tangible item purchases in one of two ways: Some believe the cost of any business item is a regular expense. Others think everything is a fixed asset. But, in fact, it depends on the situation.

This confusion results from a lack of understanding about the difference between capitalized costs and expenses. Ordinarily (but not always), an item with a useful life of more than one year is not deducted as an expense. Rather, these purchases are fixed assets presented on the business balance sheet.

The company has simply traded one asset – cash in the bank – for equipment, which is another asset. Similarly, a financed acquisition of equipment has traded borrowed money (a liability on the company’s books) for the purchased asset. Either way, profit is not affected because the equipment cost is not an expense – at least, not immediately. The cost is expensed over time as depreciation.

Depreciation

To determine the correct amount of annual depreciation, your accountant will expect you to categorize your purchases as capitalized fixed assets instead of expenses. To know how to categorize requires an understanding of the IRS de minimis safe harbor rule.

In general, this provision permits you to expense purchases of up to $2,500 per item. Small equipment under this limit is treated as an expense for office supplies, not as an outlay for a fixed asset. And that’s an important – and potentially rewarding – difference.