Income Budgeting

April 13, 2006

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Many people figure that if they closely watch and diligently control the expenditure side of the budget, the income side will take care of itself. This may be OK for individuals whose only income is derived from fixed salaries. However, individuals whose incomes vary from month to month — like most small business owners — will also want to also track income received as part of the process.

As a worst case example, you obviously wouldn't want to be in the situation of thinking you are bringing in $5,000 a month (and making spending decisions on this belief), only to find out several months later that your income has been averaging $4,000 a month. And even if you never find yourself in a negative cash flow month, seeing a pattern develop where your income is falling (or not growing as fast as your personal expenses are) may give you an early warning signal that will allow you to pare down expenses before a cash crunch develops.

Tracking personal income against expenses may also alert you to happier news. If income is rising faster than expenses, you may be able to increase personal savings, or cut back on draconian spending limits that you have imposed on yourself.

What income do you include? If the business pays you a formal salary (this is generally required for C corporations), you should use your monthly net income — that is, income after taxes and payroll deductions. If you're operating as a sole proprietorship, partnership, S corporation or LLC, you may be taking an owner's draw without making any payroll deductions.

In that case, look at your draw over the past year, and take an average figure. You can adjust this upwards or downwards, depending on your expectations for this year's performance. Don't forget to adjust your net income figure by the amount of the taxes you'll need to pay on that income. You can determine this by looking at last year's income tax return, if you were in business last year; otherwise, check with your accountant.

Also include any investment income from stocks, bonds, checking accounts, rental properties, royalties, etc.

Once you've computed your income, the next step is to take a look at the expenditures side of your budget.