Essential Insights On Successful Budgeting

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Avoiding The Common Cash Flow Budget Mistakes

   • Keep the credit cards hidden until you have paid all prior credit bills. If this means you must use some of your savings to pay off credit card debt, so be it. It is better to save the 21 percent finance charge than to earn 1 to 2 percent on your savings.

   • Do not confuse your marginal tax rate with your average tax rate. The former is the highest tax rate on your last increment of income while the latter is your total tax due divided by your tax base.

   • Do not confuse a tax credit with a tax deduction. A credit is a dollar for dollar deduction from your income tax liability. A deduction is only equivalent to your marginal tax rate. For example, in a 28 percent marginal tax bracket, a $1 credit still equals $1. However, a $1 deduction only equals 28 cents although it can also reduce some state income taxes.

   • Refinancing consumer debt with a home equity loan will not only save you interest but it will save you income taxes as well. Shop around for the lowest rate. Remember that while you can walk away from unsecured credit card debts and not be on the street, it is not the same with a secured home or business loan default.

   • Pay your estimated income taxes on time and pay forth quarter state estimated taxes by December 31. There is nothing worse than having to come up with a huge lump sum for taxes at the same time you have to fund your practice retirement plan.

Author(s): 
David Edward Marcinko, MBA, CMP, and Hope Rachel Hetico, RN, MHA, CMP

   Although some might view a budget as unnecessarily restrictive, sticking to a spending plan can be a useful tool in enhancing the wealth of a practice. These authors emphasize keys to smart budgeting and how to track spending and savings in these tough economic times.

   There is an aphorism that suggests, “Money cannot buy happiness.” Well, this may be true enough but there is also a corollary that states, “Having a little sure reduces the unhappiness.”

   Unfortunately, today there is more than a little financial unhappiness in all medical specialties. The challenges range from the commoditization of medicine, aging demographics, Medicare reimbursement cutbacks and increased competition to floundering equity markets, the home mortgage crisis, the squeeze on credit and declines in the value of a practice. Few doctors seem immune to this “perfect storm” of economic woes.

   Far too many podiatrists are hurting and it is not limited to above-average earning professionals. However, one can strive to reduce the pain by following some basic budgeting principles. By adhering to these principles, physicians can eliminate the “too many days at the end of the month” syndrome and instead develop a foundation for building real wealth and security, even in difficult economic climates like we face today.

   There are three major budget types. A flexible budget is an expenditure cap that adjusts for changes in the volume of expense items. A fixed budget does not. Advancing to the next level of rigor, a zero-based budget starts with essential expenses and adds items until the money is gone. Regardless of type, budgets can be extremely effective if one uses them at home or the office in order to spot money troubles before they develop.

   For the purpose of wealth building, podiatrists may think of this budget as a quantitative expression of an action plan. It is an integral part of the overall cost-control process for the individual, his or her family unit or one’s podiatry practice.1

How To Prepare A Personal Cash Flow Budget

   Preparing a net income statement (lifestyle cash flow budget) is often difficult because many doctors perceive it as punitive. Most doctors do not live a disciplined spending lifestyle and they view a budget as a compromise to it. However, a cash flow budget is designed to provide comfort when there is surplus income that can be diverted for other future needs. For example, if you treat retirement savings as just another periodic bill, you are more likely to save for it.

   You may construct a personal cash budget by recording each cash receipt and cash disbursement on a spreadsheet. Only the date, amount and a brief description of the transaction are necessary. The cash budget is a simple tool that even doctors who lack accounting acumen can use. Since it is possible to track the cash-in and cash-out in the same format used for a standard check register, most doctors find that the process takes very little time. Such a budget will provide a helpful look at how well you are staying within available resources for a given period.

   We then continue with an analysis of your operating checkbook and a review of various source documents such as one’s tax return, credit card statements, pay stubs and insurance policies. A typical statement will show all cash transactions that occur within one year. It is helpful to establish a monthly equivalent to all items of income and expense. For the purposes of getting started, note items of income and expense by the frequency you are accustomed to receiving or spending them.

What You Should Know About The ‘Action Plan’ Cash Budget

   For a podiatry office, the first operations budget item might be salary for the doctor and staff. Operating assets and other big ticket items come next. Some of our doctors/clients review their office P&L statements monthly, line by line, in an effort to reduce expenses. Then they add back those discretionary business expenses they have some control over.

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