Creating and following a realistic budget for your startup is essential. In fact, it can even determine whether or not your business makes it out of the gates.
A budget shows you how much money you’ll need to make in order to break even and highlights what you can and can’t afford. It also helps you to forecast and manage your cash flow, which is essential to keep your business in good financial health.
Budgeting can be a daunting task but this guide is here to make it easy by breaking it down into four simple steps.
1. Calculate Your Costs
It takes money to make money, and it’s important to work out how much you'll need to launch your business. Think about what you’ll need in order to start serving customers, whether that means setting up a website or opening the doors to a brick-and-mortar establishment.
You can generally group your costs into three main categories:
Facilities: this could be the location of your shop, restaurant, co-working space or offices. If you haven’t found the right place yet, it’s worth doing some market research to give you an estimate of how much the rent or mortgage will set you back. However, the costs don’t always end there. You might need to remodel your chosen location to fit the needs of your business.
Capital Expenditure: this is how much money you’ll need to maintain and improve your facilities. Office furniture, equipment and decorations all fall under this category.
Materials and Supplies: these are the items you’ll need to use in order to run your business, such as ingredients for a restaurant or beauty products for a salon.
Remember to stay mindful of smaller costs; it may be tempting to overlook them, but they can add up very quickly.
2. Work Out Monthly Expenses
Your monthly expenses are the costs associated with the items and services needed to run your business. You’ll need to have an idea of how much you’ll be spending each month in order to calculate the amount you’ll need to earn to break even. These expenses fall into four different categories:
Fixed expenses stay the same each month. Examples of fixed expenses include rent, internet packages, subscriptions and insurance.
Variables are more difficult to predict as they change in line with your volume of sales. Supplies, shipping costs and raw materials are all variable expenses.
Semi-variables are fixed costs which can become variable if production volume dramatically increases or decreases. A surge in demand might require you to pay your staff overtime or result in a higher electricity bill than usual.
One-time expenses are often unforeseen costs such as equipment repairs, but also might account for planned events such as business conferences.
3. Estimate Your Monthly Revenue
It’s difficult to know how much you’ll actually earn during your first few months in business. It is likely that your monthly revenue will fluctuate, so do your research and take a look at how similar business models fare throughout the year. If you’ve hired an accountant or financial consultant, they might be able to offer some valuable insight. Factors such as retainer contracts and industry-wide seasonal trends will also help you to predict what your income might be. However, it’s advisable to remain conservative with your estimates to prevent overspending.
4. Review Cash Flow
Cash is king in business and maintaining a healthy cash flow is essential for survival. Bear in mind that you won’t always be able to collect money for your goods and services straight away, which can lead to cash flow issues even if profits are high. A booming sales month is great, but you may have bills that are due before you’re able to collect payment. If you don’t have money set aside for this instance, you’ll find yourself in hot water. In this sense, cash flow is just as important as profit for the financial health of your business.
It’s wise to set aside some business savings for times when the cash flow slows to more of a trickle.
Review your cash flow each month to spot patterns, prevent overspending and budget for the future.
The Golden Rule
Finally, it’s important to follow the golden rule as you work through the above steps: stay conservative. Highball your expenses estimate and be prepared for low sales. This helps to protect your profits and keeps you on your toes to prevent overspending. Careful budgeting allows you to make prudent financial decisions and keeps your startup on track for financial success.