If developing a budget is time-consuming, tracking the numbers month in and month out can be killer. Software tools, such as
Intuit QuickBooks and Plan Guru, make it easier. With these programs, you can track and categorize your spending to stay on
budget. Some can automatically sync data from your bank and investment accounts, eliminating time-consuming data entry.
Often, you have the ability to search for specific transactions in your data and store attachments (such as a receipt image to a
purchase record), eliminating uncertainty and aiding in auditing.
Advanced financial software solutions hosted in the cloud enable staff and outside accountants to view, manage, and approve
budget information online from anywhere—even a mobile device—simultaneously and securely. Online tools such as Xero enable
you to track data online and import real data into tools such as Excel and Microsoft Office 365 to improve your forecasting.
To help you track expenses on the go, many of these programs have mobile versions. Other mobile apps can cut down on the time
you spend adding up receipts. ProOnGo from QuickBooks not only scans your receipts but also files them in custom templates
and syncs the data to your QuickBooks budget. —By Carolyn Schwaar
2. The Capital Budget
Purpose: to plan for major expenditures that will provide
a return to the business over the course of several years.
Significant spending—such as the purchase of o;ce equipment or a commercial rental property—should never be pursued on a whim.
By conducting an objective analysis, you can compare
potential investments and determine which are likely
to have the greatest value for your business.
Consider t wo examples: Project 1 requires a $10,000
initial cash outflow and o;ers decreasing cash inflows
over the next five years totaling $15,000 ($5,000 in year
one, $4,000 in year two, $3,000 in year three, $2,000
in year four, and $1,000 in year five). Project 2 requires
a $50,000 initial outflow and provides steady cash
inflows of $15,000 per year over the five-year period
It’s easy to compare the t wo projects using an online
calculator. Try the “Net Present Value and Profitability
Index Calculator” at the Web site Calkoo ( www.calkoo.
com). Unless you’re versed in finance, some terms on the
calculator may be unfamiliar, starting with “discount
rate.” That figure determines how much future cash
flows are worth today. The higher the rate, the more
conservative your analysis.
Leaving the discount rate at the default 10 percent
and changing the investment period to five years, input
what you’ll spend initially in the “Individual Invest-ment/Cash Out” column. Then input what you’ll get
back in the first five years in the column headed “
Cash-In” (don’t use commas in your numbers).
The net present value is calculated automatically
on Calkoo. The NPV represents the value of each
project today, and it’s determined by factoring in
the size of the initial outflow and the amount and
timing of subsequent inflows. The timing of inflows
is important because the sooner they’re received, the
more valuable they are (because of inflation and the
potential returns that could be earned elsewhere).
If the NPV is negative and you’re sure your inputs
are correct, then you probably shouldn’t pursue the
project any further.
In the examples above, Project 1 and Project 2
both have a positive NPV ($2,092.13 and $6,861.79,
respectively). Therefore, you could justifiably pursue
both projects because both are expected to add value.
Usually, however, companies don’t have this luxury due
to limited resources. So how do you choose what to invest in?
Frequently—as in these examples—the project with
the bigger initial investment has a bigger NPV. But,
does that make it a better choice? Not necessarily.
That’s where the profitability index comes in. This figure
(also calculated automatically on Calkoo) compares the
NPV to the initial investment amount. The larger the
PI, the better. In the examples, Project 1 has a higher PI
( 1.2092 versus 1.1372).
Still, after projects have been analyzed, you must
review them through the lens of common sense. Buying new artwork for your o;ce may be costlier than
upgrading to the newest iPad, but only you know
how to assess the importance of one over the other.
It could well be appropriate to accept a project with a
lower NPV or PI. Don’t rely solely on the quantitative