So, you have finally started your own business? That’s a step in the right direction and one that many only dreams of and never execute. What you should know is that for a startup to operate without a budget is a death knell. Businesses experience monetary instabilities, and if you are not ready for them, the business will fail quickly and leave you with regrets and worse still, debts. Don’t allow that to happen to your business; instead, make an informed estimate about what your business’s assets will be. This means comparing what has happened in the previous months and making an approximation for the months to come.
When budgeting for a startup, you have no past records of operations, you are going to work on estimates. Start on a month-by-month basis and create a budget based on the estimated cost of each item.
In doing so, you will need to put the following into perspective:
• The amount of loan you will need if any
• The prices will you set for your products
• The sales you expect to make in a month, and how will they grow the following month
• How much you expect to sell in the first year
• The estimated cost of production each month
• The day-to-day running expenses
• The number of workers you will have and what you will pay each of them
Why a Budget is Important for Your Startup:
• It gives you total control of your business, and the business gives you few surprises
• It also will help you keep you out of debt by planning for the low business-income months
• It will show you what you need to do to make profits
• It helps you have a peek in the future and decide your next move
• It reveals excess cash that you can re-invest
How to Create Your Budget:
• You can create it manually on a spreadsheet
You are able to track the figures you need with ease. The primary columns might be comprised of costs and revenue. The sub-columns beneath the primary column show the estimated and the actual costs and revenues, as well as the difference.
• You can use a software package budgeting function
• You can also buy budgeting software separately
Budget for your first-year startup.
Below are five ways to build a useful budget for your first-year startup.
1. Maintain a Savings Account
The expenses of a startup always exceed the planned expenditure. It’s therefore advisable to have a cushion in the form of savings to counter this. Your business should save enough to cover a few months during which the cash flow is low.
Do not use the savings unless it is necessary to and even when you do, replace it as early as possible. Doing this makes sure your business cannot fail as a result of cash shortages.
2. Do a Cash Flow Analysis
A cash flow analysis aids in showing you the source of money, as well as how it’s being used.
The source of cash could be the sale of a product, your savings, investment gains, etc.
The use of cash involves cost of goods, employees’ pay, loan interest, etc.
This analysis allows you to know your expected income per month so that you can plan accordingly. With a cash flow analysis, you can tell if you need to chip in to keep your startup afloat or if it supports itself.
3. Estimate the Fixed, Variable and One-off Expenses
These are expenses that will have to be paid whether you are operating at a profit or a loss. The fixed costs include:
- Legal services
The variable expenses are the ones that go directly into production, and they differ now and then. They are things like:
- Raw materials
The one-off expenses include:
- Office supplies
These expenses should be overestimated so that even the month with the highest costs is well cared for.
4. Recheck Your Budget from Time-to-Time
The budget is not cast in stone, but instead, its aim is to help you plan better. This means the budget will change, and you need to adjust to it. Keep looking at your budget every now and then to see what needs to change to match with the happenings in the business. Adjust whichever costs need to be adjusted so that you can have a near-perfect budget as possible.
5. Estimate the Sales Per Month
This is hard to do because it is a new company whose performance you are still trying to understand. What will help you is to approximate your sales assuming three possible scenarios as listed below:
• Expected scenario
This is a projection that you do, assuming everything you put in place works as it should.
• Worst-case scenario
This is the budget for a scenario in the first six months where everything goes wrong and is below the expected.
• Best case scenario
A budget in this situation assumes an outcome that surpasses any expectations for the first year of operations.
Having these forecasts will keep you be prepared should any of them become a reality.
Guidelines for Making Your First Year Startup Budget
• Know how much your business makes in a month
• Take into account your fixed expenses per month
• Determine your variable costs per month
• Make a cash flow analysis
• Make your projections
In conclusion, it’s imperative to have a useful budget for your first-year startup. You don’t want all your effort starting a business to come to nothing because of failing to have a budget. As we have seen, budgeting is something that you can easily do on your own. Come on, get a pen and paper and write down those monthly revenues and expenses. Similarly, put aside some savings for days when the business cannot meet its liabilities. Do not forget to check your budget from time to time to determine where things stand.
These instructions should help you have a budget with minimal effort on your own. When your business grows, enlist the services of a professional.