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Staying in Fiscal Shape

Manage your cash flow and become a more organized business owner.

By Roger J. Tuttle, CLU, ChFC

Cash and profits are not the same thing. Keeping track of income without keeping track of current and expected expenses is like watching a football game and only knowing the score of one team. Establishing good financial systems and procedures is necessary for a business to get into and stay in good fiscal shape. The more you treat the financial aspects of your business in a professional manner, the better are your odds of succeeding over the long haul. The following four steps are the basics of a good plan of fiscal responsibility for your practice.

• Establish a business checking account. This will help you think more like a business owner and give you the tools to use your money more effectively. By developing a mindset that considers the money in this account as the business' money instead of your personal money, you will be more inclined to budget effectively for expenses, including those that will support the growth of your practice.

Open the account simply as "Joe Jones, Business or Operating Account." Use it as the place into which all monies flow into and from which all business bills are paid. When you receive any sort of compensation, deposit your checks and allowance into your business account. If you're a registered representative, check with your broker dealer to ensure that you're not violating any rules when you deposit your BD checks into a business account. If it is not permitted to deposit BD checks directly into a business account, deposit the BD checks into your personal account and write a check from that account to your business account for a like amount.

Get a business credit card and pay for all business expenses through that card. This will build points for redemption and help keep track of expenses in one handy place. Get into the habit of paying this bill in full each month instead of building up a balance that costs you interest and possibly fees.

Take a "draw." Set up your business life to support your personal life. We tend to increase personal spending if our income increases, so one easy trap is to have a few big months of commission income and subtly increase personal spending to keep pace with earnings. Soon you have a few slow months and quickly you're behind the "Earn-Spend Curve" because you have taken on extra living expenses you can't afford to maintain.

Stay ahead of your "Earn-Spend Curve" by establishing a regular draw each month. Take out enough to pay your expenses and estimated taxes and leave the balance in your business account to help tide you through any lean months. Lean months do happen. Be prepared for them and you'll be glad you did.

• Operate a set of business books. Use QuickBooks, Microsoft Money or a similar package to keep track of your business income and expenses. It will save you a tremendous amount of time and work at tax time and give you a running record to compare to previous years. By using your own Profit and Loss Statement, you'll be able to tell how well you're doing compared to prior years and compare your income and expense goals for the current year. This is the time to budget expenses and establish a business plan for spending. The primary purpose of your business is to make a profit, and this is a good way of determining the kinds of profits your business is generating.

As I mentioned earlier, when you establish a Profit and Loss Statement and income and expense goals, you will be less tempted to think of the revenue generated as "your money" and will be more likely to manage it correctly. The reality is that it's not all "your money" to spend. You have partners in the IRS, the Social Security Administration and your own state's treasurer.

Even after you pay your taxes, it's still not all yours to spend. All businesses have to set money aside in a reserve so they can take advantage of opportunities and for contingencies. The other direct benefit of a good set of books is that you'll save money on tax-preparation expenses because everything will be well organized for your tax preparer. Finally, if you're ever audited by the IRS or the state, you'll have comprehensive records in place to verify and justify your income and expenses.

• Build a reserve. If at year's end you have an excess of cash after your draw and taxes, it's OK to give yourself a bonus. But don't empty your business account to do this. Keep some of that money as a reserve to cover the contingencies previously mentioned. Set a goal for a reserve account. Commit to making your reserve account grow each year and enjoy watching your business develop assets.

Another important reason for establishing a reserve is to have money readily available for opportunities as well as to establish cash reserves fund deductibles and longer waiting periods on health and disability income insurance contracts. Put the money for this reserve aside in a CD or money market fund; separate it from your draw and the business checking account. This is more form over substance since it's all your money, but it's a good example of where form is important.

You are not just the CEO of your business; you are also the CFO. Both are very important jobs. If your business generates income but it's not properly managed, it will do you no good in the long term. By following these four simple steps, you will be well on your way to better managing your business cash flow and becoming a more organized business owner.

Roger Tuttle, CLU, ChFC, is a nationally known business coach and practice-management consultant. Contact him at or at 410-703-5769.

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