The importance of budgets and cashflows extends well beyond small business and is a fundamental in even our most basic and personal living costs.
All too often it is implied that only businesses really need to assess their costs, margins, cashflow and overall profitability, but the truth is, even in the smallest of households (singles) we need to assess and manage cashflow and finances.
With the looming increase in living costs, budgets and forecasts have never been more important.
8 TIPS to cope with increased living costs
Create or Rework your budget and stick to it.
Negotiate your bills eg. electricity provider .
Stop upgrading your phone each year just for the sake of it.
Cut back on discretionary spending (ask yourself if you need it, or want it)
Check your bank account and cut back on those unnecessary subscriptions that you no longer need, or even remember that you have.
Stop using credit cards and work towards getting out of debt. (Save first, buy second).
Plan your meals ahead of time to benefit from left overs and lower the cost of dining out
Look out for cashback offers and discount coupons.
Preparing a budget and cashflow forecast can give you a more realistic measure of where you are heading and is a proactive approach to living within your means.
What is a budget?
A budget is a forecast based on historical spending and income, making assumptions and allowances for expected changing conditions (eg: maternity leave or seasonal income) A budget enables you to set goals, forward plan and make appropriate decisions relating to your income and expenses.
DID YOU KNOW? Even when your business is making a profit, you could be playing a dangerous game if your personal expenses are exceeding your business profit (after tax). We often see sole traders and small business owners forget that the money in their business account has not necessarily been taxed yet, and hence, provides for a false sense of security.
At MQ Accountants, we focus on helping individual tax payers and small business owners understand their ongoing tax obligations, cashflow pitfalls and financial awareness.
How to create a budget?
1. Identify your income AFTER TAX
If you are an employee (PAYG) it is likely that the wage you receive into your bank account has already been taxed, but if you are a small business owner, you may trade the entire year without paying 1 cent in tax. (Until you lodge your tax return, when it can be a ghastly shock as to what you owe in tax)
It's a good idea to engage with an accountant or tax agent, to help you understand what tax you may need to pay to avoid sudden tax shock at the end of the year.
2. Identify your Fixed Costs
These are costs that are fixed and paid on a regular basis, eg: a car loan, Rent, mortgage.
3. Identify your Variable Costs
These are things that can be either lowered or cut out altogether, if and when you really need to.
There are two types of variable costs : Wants and Needs.
Take a close look at these costs, as many wants can be 'dressed up' as needs, when in actual fact, they are merely wants. Variable costs can include things like your electricity bill (a variable need) but also your entertainment (a variable want)
TIP#1- Identify two types of variable costs (wants and needs) and list them separately.
TIP#2 - Running a spending diary for a few weeks can really help you understand the spending that you make on 'wants' eg: coffee's, retail therapy etc. This will enable you to more accurately estimate your variable want costs.
4. Analyse your income and expenses
Compare your actual income (after tax) against your expenses whilst removing all 'want' expenses. (Ensure to still include your variable needs using an estimate.) Analyse this report closely and then then add back an estimate of your 'want' expenses.
HINT - We always suggest that you also include a 'buffer' / contingency amount for unexpected costs like, a speeding fine, or a breakdown of your washing machine.
5. Calculate your net cashflow and make the necessary changes
If your income (after tax) is less than your expenses you are most likely 'living beyond your means'. This is when you need to look more closely at cutting some of those want expenses back or, if possible, you will need to increase your income. Perhaps you need a second job, or ask to increase your hours?
Remember that credit card interest is extremely high, and whilst the bank only requires you to pay the minimum amount, if you look closely at your credit card statement, it could taken you years and years to pay it off if you only pay the minimum amount.
The increase in living costs seems to be here to stay, so taking a proactive approach and planning ahead may be just what is needed.
If you need help with your Individual or business tax returns, or simply looking for a new accountant or tax agent, give us a call today 0409 715577 or contact us here.
This articles intention is to inform rather than advise and is based on legislation at the time. Each Taxpayer’s circumstances vary so we strongly recommend that you discuss this information with your Tax Agent, Accountant or Bas Agent before implementation. If you take, or do not take action as a result of reading this article, we accept no responsibility for any financial loss incurred. This is general advice only.