This table summarizes both company and personal income and expense data. The “Total” column in the three bottom rows displays critical information about

the viability of the business and itís ability to support the ownerís personal living expenses. Debt-to-income ratio should be no higher than 36%. Disposable income can be reduced by the amount shown and still cover expenses. Cash sufficiency shows for how many months expenses can be covered if income does not increase.
This table summarizes both company and personal income and expense data. The “Total” column in the three bottom rows displays critical information about the viability of the business and itís ability to support the ownerís personal living expenses. Debt-to-income ratio should be no higher than 36%. Disposable income can be reduced by the amount shown and still cover expenses. Cash sufficiency shows for how many months expenses can be covered if income does not increase.

This brutal recession has ruined all your rosy planning. Maybe the worst is behind us, but nobody really knows. So before you borrow even more money or run that break-even scenario again, let’s take a hard look at the truth of your situation. Because your company not only pays its own expenses but also serves as a vehicle to fund your personal living expenses, we’ll calculate both personal and company annual income and expenses, as well as determine what you own and what you owe.

Use the four-tabbed worksheet . To make this a real stress test, keep owner’s salary at zero in the company overhead calculation. This will give you a clear picture of whether or not there will be enough company earnings for you to meet both company and personal goals. The result might look something like the table shown here. Let’s look closely at the last three lines.

Debt to Income

This number shows how much of your income goes to pay for debt (your mortgage is counted in the “personal” column). The rule of thumb is that total debt payments shouldn’t be more than 36% of annual gross income. In our example, both personal and company debt-to-income ratios are quite a bit higher than this, as is the combined ratio of 59% in the “Total” column. Not good.

Disposable Income

This number shows what percentage of your income is available to spend after paying living expenses and company overhead. If it’s large, you have plenty of flexibility to handle a drop in income or an increase in expenses. If it’s small, you’re close to the edge and should plan for drastic cuts. In our example, personal income could fall by 22% and still cover personal living expenses. But the company has no wiggle room and brings the combined number down to a dangerous 5%.

Cash Sufficiency

This number shows how many months your cash will last based on current expenses. Again, the personal number is high while the company number is low.

These examples are hypothetical, but they illustrate how personal and company finances work together, and they clarify where each stands. If both sets of numbers reflect positive conditions, with vigilance you will probably be OK. But if one is out of whack, make immediate adjustments. If both numbers are in trouble, look for some alternatives to protect your future.

—Judith Miller is a Seattle-based remodeling business consultant and trainer specializing in accounting, finance, and computerization. Visit her blogs at REMODELING online and at Wordpress.