Guest Post by: C. Fong Hsiung
I met Fong Hsiung in an online writer’s group. I didn’t realize at the time, that she is also an accountant. She has both a preference for words and a gift with numbers. Solopreneurs, including Authors, often need help with bookkeeping and budgeting. Who better to ask for tips than someone who’s good with this and also understands the mind of an artist?
Do you need a budget?
Any time you earn income from a source other than your employer, then you’re self-employed or you own a business. Whichever way you look at the situation, you NEED to have a budget.
Writers receive royalties for their books or free-lance articles, payments for speaking engagements or coaching workshops. Writers must spend money to make money. Therefore writers must understand their cash flows. The only way to do it well is to start a budget. You can then turn the budget into a fluid forecast that you tweak as you go along.
Why do you need a budget?
If you’re providing a service or selling a product, you should know how much you’ll be paid and when. It’s not enough to know only your revenue stream because you also need to get a handle on where you’ll be spending your money, how much and when. By putting the inflows and outflows together you’ll get a picture of where your finances are headed.
Now simple mental math will show that if you’re earning x and spending y, then the difference is what you pocket…basic shoebox accounting. Why go through the trouble of creating a budget? You ask.
Have you ever been in a situation where your bills are coming at you faster than you’re getting paid? How about wanting to go for a vacation and wondering when and if you can afford it?
With a budget you could predict these and much more. You’ll be able to adjust your finances and figure out alternative solutions.
Below is a sample of a simple budget combined with a cash flow forecast model. The amounts may stretch your imagination, but bear with me for a moment. I’m using the same numbers every month other than the first month to illustrate how the math works. You may tailor this model to include your own data. Be realistic and honest when preparing your budget.
How do you go about preparing a budget?
So now you quirk your eyebrows and say, “It’s fine for you to think this is easy stuff. After all, you’re the accountant. How do you get the numbers to appear on the spreadsheet so they mean something?”
I’ll demystify the process in a few steps.
The opening cash position in the first month can be viewed as optional entry. Use it to bring forward previous net earnings to preserve the continuity for those activities not recorded in this budget model.
List all your potential sources of revenues.
What services or products are you offering for sale? Write these down. Hint: look at your previous year’s tax returns to see if any sources of income will repeat in your current budget year. Be realistic, but err on the conservative side. Now total up all your revenues.
Write down the anticipated activities you must perform to earn your revenues. For each activity, analyze the potential costs, if any. As a writer your expenditures may include a computer, software, office supplies, and/or editing costs…the list goes on.
Next identify your recurring expenditures, e.g. web hosting, utilities, insurance, are some that come to mind. If you can’t remember all them, review your bank statements for the last twelve months. With online banking at your fingertips, this should be a cinch. Now total up all your expenses.
Derive your net income by subtracting the total expenses from the total revenues.
Let’s figure out your cash flow next. During the first month, the sum of your opening cash position and your net income or (loss) results in your closing cash position. Thereafter, carry this ending balance to the beginning of the next month, and continue to add your net income or subtract your net loss against it. The spreadsheet I’ve developed automates the calculations.
Putting It All Together
Now that you have your entire year’s budget and cash flow in front of you, you can anticipate trouble before it happens or plan for your next major purchase. Besides using this model for your business, you can even use it for each book or project. Of course, having a budget doesn’t guarantee a positive cash flow. Clearly that’s a function of your revenues and expenses.
Finally, you also need to compare your actual results to your budget and see how they match up, but that’s a topic for another blog.
If anyone is interested in the Excel model shown in this blog, you can download it free here. Previous knowledge of Excel is helpful. No, I don’t need your email or anything from you.
About C. Fong Hsiung
She is writing her second novel, working title Wait for Me. She is on a mission to learn something new continuously. Her latest project is learning to speak Mandarin, and she’s hoping to pick up coding to add to her skillset later this year.