Finance 101 for eWorkers: Budgeting

Kristin Kane writes for www.ework.com – a Ms.Money partner.

When the three little pigs set out to seek their fortunes, Practical Pig was the one who successfully withstood the attacks of the Big, Bad Wolf. His saving grace? One house of bricks, and a good deal of foresight. So when you leave the 9-to-5 nest to seek your fortune as an independent professional, keep in mind that a little planning goes a long way. And the soundest way to map your financial future is with a budget.

Creating a budget for your business

Before you begin the budgeting process, you will need to decide on a reporting period, or period of time your budget covers. In most cases, a month is sufficient. But if you have business expenses that are only billed a few times annually, you may want to create a 6-month or annual budget.

The following three-step process will help you develop a budget for your business:

1. Determine your target income

The first step in creating a budget for your business is to determine your target income for the specified reporting period. This figure should include the cost of your medical/dental insurance premiums, retirement plan contributions, and any other benefits you have established for yourself. Additionally, be sure to factor in the amount you will pay in federal and state taxes.

2. Enumerate your business expenses

Once you have determined your target income, you can move on to the expense side of the equation. It is advisable to divide your expenses into specific expense categories (e.g., office equipment, advertising, consultants, business loan payments). The next step is to determine how much you can expect to pay in each category within a reporting period. Your checkbook and petty cash receipts will provide most of the information you need. Keep in mind that if you are planning on increasing your expenditures in any category, your budget should reflect that.

3. Calculate your required income

The final step in the budgeting process is to calculate the amount of revenue you need to bring in. The amount you earn from independent projects should equal the sum of your business expenses and target income. For example, if your monthly target income is $5,500, and your monthly expenses are $350, you will need to earn $5,850 per month to meet your goals.

Evaluating your budget

The first draft of your budget is a rough picture of your financial plan for your business, and will probably need to be refined. Start by taking a look at your required revenue. How many projects will you need to complete each month to reach this figure? Is this realistic? If your required revenue is unreasonably high, you may need to cut down on your expenses, or rethink your target income. If, on the other hand, you find that you can meet your required revenue with only a few days’ work each week, you might want to take on more projects and raise your bottom line-or simply bless your lucky stars and pour your free time into gardening.

As you refine your budget, stay focused on what you want out of your business. The best budget is one that reflects your goals and helps you to achieve them comfortably and efficiently.

Facing the Cash Flow Conundrum

One of the most trying financial issues facing independent professionals is cash flow, or temporary lack thereof. Due of the nature of contract-based work, revenue can come in fits and spurts. But even if you are working steadily, you still may not be safe from the cash flow demon. Suppose you have just completed a $3,000 project. So far, so good. But now suppose your rent is due on the first of the month, but you don’t expect payment until the third week of the month. You have a cash flow problem.

One aspect of budgeting is assessing these risks and forming a contingency plan. Many independents believe it’s best to keep the equivalent of three months’ pay in the bank at all times. Some independents opt to take out a short-term small-business loan when they foresee a lag in cash flow. When I started out as an independent, I worked on temp assignments in between projects. Whatever you choose, remember that a viable contingency plan is an essential part of a sound budget.

For additional help refining your budget, talk to an accountant who specializes in small business.