Launching any new business is a serious decision, one with the potential to affect your family’s financial wellbeing for years to come. For this reason, entrepreneurs should take time to create thoughtful business budgets before striking out on their own. Because most new businesses are dealing with limited resources, it’s important to allocate your startup capital carefully. A good budget helps you stay prudent in the way you spend your money while ensuring you don’t skimp on essentials your business needs to survive.
Along with helping you allocate capital and resources, a budget provides you with a valuable roadmap for your business’ future. By laying out your sales revenue goals in a detailed budget, you can ensure you’re staying on target throughout the year. Additionally, banks and other investors will feel more comfortable lending to you once you have a solid financial plan in place.
Components of a Business Budget
The following elements are crucial for solid business forecasting.
1. Startup Expenses
It doesn’t matter how great your business idea is if you don’t have the resources needed to get the company off the ground. That’s why estimating startup costs is essential when creating a business budget.
While startup expenses will vary across different business types, most companies are required to pay some type of licensing or incorporation fee. Additionally, startups may be responsible for insurance payments, rent, utilities and the cost of supplies, as well as website hosting and maintenance. Once you’ve identified all the necessary supplies, take time to estimate the cost of every item on your list.
Not sure what costs your startup will face? Do your research to ensure that your budget is as accurate as possible. If you’re building a budget for the first time, take time to assess the costs and profits of other similar businesses in your region, and generate averages based on your research. After collecting the necessary data, you’ll have a foundation from which to predict earnings and calculate overall revenue for your business.
2. Operational Expenses
After you’ve accounted for the startup expenses in your budget, you should determine how much money is needed to stay in operation from month to month. Although the goal is to start earning immediately, many companies are slow to turn a profit. Startup owners must ensure they can cover all their costs while the business is getting off the ground.
Generally, businesses divide their operating costs into fixed and variable expenses. Fixed expenses are budget items with consistent costs, like rent and business insurance, which do not vary from month to month. On the other hand, variable expenses include costs that change throughout the year, like utility payments, raw materials and supplies. Other common costs include website development, marketing costs, employee salaries and security deposits on office space.
Once you’ve calculated your startup and operational expenses, you can take steps to adjust your budget as needed. For example, you can locate a lower-priced supplier or choose to operate out of your home instead of renting office space. Create a spreadsheet in order to track your expenses and startup capital more efficiently, and remember to keep it updated throughout the year. If there’s a significant gap between your startup funding and your expenses, you may need to pursue additional financing.
3. Personal Expenses
Even though most startup founders understand that launching a business is costly, very few fully consider the effect that launching a business will have on their personal finances. To protect your family’s fiscal wellbeing, make sure your business budget accounts for personal expenses, such as mortgage payments, utility costs and groceries. If you’re leaving your day job, you should also factor in the increased cost of purchasing your own health insurance. Record all your family’s expenses in a spreadsheet, and remember to add a little extra for unplanned emergencies.
4. Short- and Long-Term Revenue
Of course, there’s more to budgeting than assessing costs. Startup founders must also estimate their business’ projected revenue for a given period. Your revenue sources can include the sale of goods or services, income generated through selling a portion of your business, or other income from company-owned investments.
To calculate a revenue projection, add all your expected revenue sources together, and estimate how high and low each could conceivably go. These are your best- and worse-case scenarios, which can help give you an idea of how much revenue you can include in your budget. A good budget will help you decide how to use this revenue to achieve your goals moving forward.
Once you’ve calculated projected revenue, you will likely need to make adjustments to your budget. Remember that the purpose of a budget is to guide you in making important decisions about your company development without giving in to brash choices. While most companies take a slow and prudent approach to achieve their goals, it’s a good idea to budget for a best-case scenario as well. If you have some unallocated cash to spare, consider building some of it into your budget in case demand for your product or service quickly exceeds supply.
5. Create the Best Budget for Your Business
Budget planning is an essential aspect of any new business venture. Nonetheless, the process of drafting a first budget can be complex, especially for new startup founders. When in doubt, consult with a professional financial advisor or CPA for assistance. You can also purchase budgeting software, such as QuickBooks, to expedite and manage the process. Programs like these make it easy to calculate your company’s profits and losses, as well as create attractive reports to share with your employees and stockholders.
Launching a new business can be stressful. However, the rewards are well worth the effort. Invest your time in creating a detailed budget to give your new business venture the best shot at succeeding.
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