It’s hard to create an accurate budget as an individual, let alone a business that only enters the market. That doesn’t change the fact that budgeting is crucial for any startup company. Most businesses have limited funds initially, so you need to manage money carefully. Creating a business startup budget is critical and gets you a step closer to potential success. Keep reading to learn about the process of preparing a budget for a startup company!
It All Begins with Day One
Some even call it “day zero,” but regardless of the name you use, it’s when you officially open doors to customers. As a startup, you can expect mostly expenses in the beginning. You need to be ready for expenses directly related to starting your business.
The “day-one” costs include:
- Business facilities. Do you plan to improvise an office inside your house? Are you planning on renting a warehouse or launching a store in a local mall? Depending on funding, you can even purchase an office building. Depending on your approach, business facilities could come with different costs involved.
- Capital expenditures. Do you need equipment for your business, such as machinery or computers? Is it necessary to have a vehicle? Perhaps you only need a desk and some furniture for the improvised home office. Make sure to be as detailed as possible when identifying capital expenditures.
- Supplies and materials. You might need production materials and other supplies for your office. Perhaps you need some paper to print promotional flyers. List all supplies and materials you need to begin working.
- Any other relevant costs. You probably need to pay to register in the database of local businesses. Some niches require getting permits and licenses, and you might need a professional accountant to handle the paperwork. And you also need startup company financial statements.
You could be using personal items for your business. Many startup owners decide to note them since they could serve as collateral when applying for a loan.
What Will Your Fixed and Variable Expenses Be?
A detailed business startup budget covers both fixed and variable expenses on a monthly level. The difference is evident – fixed expenditures are those you expect regularly. Their amount doesn’t change (often), and you can predict them accurately.
Basic fixed expenses include utility bills, rent, phone expenditures, employee payments, insurance, advertising, professional consultants, loan payments, etc. You can divide them into subcategories. For example, professional advisors could include accountants, lawyers, etc. You could benefit from knowing how much each of them costs.
It’s now time to move to variable expenses. For example, these are sales commissions. If your affiliate makes more sales, that’ll increase the commissions. Variable expenditures include raw materials, production, and shipping costs. These also vary on your or customers’ orders.
Predict Monthly Sales
The problem with a startup budget is you don’t have historical data to rely on when predicting potential monthly sales. You could analyze the market and use information from the business plan. Despite that, you need some wiggle room when estimating sales.
The best approach is to create multiple scenarios. First, you want to identify the lowest expected sales for the next month or year. The next step is being optimistic and clarifying sales revenue that would exceed your expectations in the initial year. You have a minimal and maximum gap, and it’s most likely the actual sales revenue would be in between. That’s why you could add another scenario with realistic revenues from sales.
Another thing to note is not all buyers would pay you during that month. That’s why experts suggest you should display 85% to 90% of the sales expected. If your total sales value is $100K, be careful and display only $90K.
The Importance of the Break-Even Point
The $90K from sales isn’t pure profit for your company. You spent some money during the production process, so calculate those expenses now. It’s easiest to estimate the expense you have per product unit or an hour of service. You might have invested $30K in the products you sold, so don’t forget to include these costs in your budget.
It helps to establish a break-even point for your products or services. That point marks when you begin earning from each sale or service provided. It’s important info that helps shape up prices and optimize profit.
It’s Time for a Cash Flow Statement
This is an important projection since it describes how much money goes through your company. Monthly cash flow statements are the most common and vital to see if your business remains in the black.
You might be earning a profit from selling your products. But that won’t be enough if your cash flow statement shows you are losing money. That makes this statement crucial, so focus maximum attention on it.
A cash flow statement is nothing more than analyzing all company’s transactions in the specified period. Here’s an example:
- Collected money from sales – $90K
- Variable expenses – $30K
- Fixed expenses – $53K
- Balance: $90K – $30K – $53K = $8K
This statement shows your cash balance for the specified period. You can adjust sales and expenses to calculate best and worst-case plans. It helps avoid potential pitfalls and ensures your company stays afloat.
Final Thoughts – Budgeting Is Crucial for any Business
Once you have an overview of total costs and estimated sales projections, you can perform the necessary budget adjustments. Is it possible to save by reducing some expenses? Will you earn enough in the next months to buy new equipment? Is there enough money in the bank to increase the marketing budget?
As a startup business, you don’t have much room for improvisation. You want the best results with the least money invested, and budgeting can help achieve that. If you feel creating a budget is complicated, don’t hesitate to contact expert advisors to work with you. They can use experience and knowledge to define your budget to the smallest detail. It’ll be an essential component of managing your finances and taking your startup forward!