Wouldn’t it be nice if all you had to do was get your revenue started with investors for your business? Unfortunately, 90% of total startups fail. One of the vital parts of keeping a new business afloat is to watch what you spend.
Startups should have a budget. A budget is also known as a profit and loss statement, which is the estimated revenue and expenses in a certain period of time. If you don’t know how a purchase will affect your startup, everything could come crumbling down.
Continue reading for seven tips that will help you create a start up budget.
1. Make a Budget for Day One
A “Day One” budget is your budget for what you need before you can actually open your business. You should have this list whether you have a physical location or a website.
The budget will include facilities costs, fixed assets, materials, and other expenses. Some things listed below may not apply to your budget.
Facilities costs are for the location you’re setting up shop. You could buy a whole building or lease a space. Other than monthly payments, a security deposit, and signage, you’ll probably have to improve the location.
You may need to put in walls to create separate rooms, make cubicles, and add bathrooms. Remote businesses will have to calculate the cost of fixing up their office or building one.
Fixed assets or capital expenditures are the things that go into your location. They’re the desks, chairs, conference tables, printers, computers, cars, and anything of the sort that complete your business space. The material portion of your budget will consist of promotion materials, marketing materials, and office supplies.
Miscellaneous costs are required permits and licenses, insurance deposits, business registration with the state, and operating documents. You’ll have to pay an accountant to start your accounting system.
2. Calculate Monthly Expenses
List everything you’ll be spending money on monthly. There are fixed expenses and variable expenses. Research the estimated prices for these costs.
Fixed expenses never change and have nothing to do with how many sales you make. Here are some monthly costs:
- Employee pay
- Business insurance
- Business loan bills
- Equipment lease bills
- Website service
- Office supplies
- Credit card processing
- Legal and accounting fees
- Marketing costs (ads, social media, etc.)
Variable expenses depend on the number of sales you make in a month. They include:
- Sales commissions
- Production costs
- Cost of wholesale goods
- Raw materials
- Packaging, shipping, mailing, and postage costs
Only businesses that sell a product will have this many variable expenses. Service businesses often have fewer costs.
3. Estimate Monthly Sales
You can’t perfectly forecast what sales with look like because your business is brand new. However, you can come up with a few estimates to give you an idea of what directions the company could go in. You’ll have three budgets: a best-case scenario, worst-case scenario, and a mid-point scenario.
When calculating how much money you’ll get in a month, don’t think 100% of the money will be from collections. There are other ways to add to monthly revenue, such as advertisements. A collection percentage specifies the revenue amount that came from sales.
The worst-case scenario should have the lowest collection percentage, with a lot of the revenue coming from other places. This scenario shows barely any sales within the first six months or year.
The opposite, the best-case scenario, will have a good amount of sales. This is the desired outcome for your company.
The mid-point scenario is a realistic estimate. It falls near the center of the other two scenarios.
Figure out what the estimated variable expenses will be for a month by multiplying the number of sales by the cost of each unit. Consider writing in the break-even point, which is when the company’s monthly revenue is equal to the monthly costs. You’ll be able to see when profits may begin.
4. Estimate Carefully
Don’t overestimate or underestimate sales and expenses. You have to be prepared for the worst to happen.
To be on the safe side, set sales at a lower number and expenses at a higher number than what’s expected. Sure, your calculations may be off and you could end up having higher profits, but at least you aren’t bankrupt.
You could easily come across extra expenses. It takes longer than you think to make enough sales. New businesses need time to get off their feet.
Estimating the numbers you want rather than being realistic will put your business on shaky ground.
5. Manage Cash Flow
Cash flow is how much money is moving into and leaving your company each month. The final number, called the total cash balance, is different from your profits. It’s the amount you’re left with after paying for all of your bills and expenses.
These are the following cash flow totals you’ll have every month: sales/collections, fixed costs, variable costs, and total cash balance.
Each of your scenarios will give a different total cash balance. This will tell you how big of a loan you may have to take out. If you’re worried about having poor credit, choose a lender that doesn’t do credit checks, such as Bonsai Finance.
Save your monthly cash flow statements for when you have to borrow money. Lenders usually require at least three years of cash flow statements. They’ll also want three years of quarterly and annual profit and loss statements.
6. Use a Program to Create the Budget
You can make your budget using an accounting software program. These programs will save you a lot of time but will become a bullet point in your budget. Try to pick a program that offers a free trial period.
Some commonly used programs are QuickBooks, Wave Accounting, and Xero Accounting.
To save your money, you can opt for a spreadsheet program like Google Sheets or Excel. Your budget will be on one spreadsheet and each budget category (monthly sales, costs, cash flow, etc.) will have its own worksheet.
7. Make a Marketing Budget
Part of your monthly expenses is what you spend on marketing. Marketing can include business cards, online ads, flyers, and more.
Customers get their first impression of a business from their branding. A good brand design will cost a few thousand dollars, although you can get away with hiring a talented freelancer. Start by purchasing branded products you know you need.
Keeping up a professional website will also cost you thousands of dollars. The website has to constantly have fresh content and SEO. You also have to pay the web hosting service and make sure the site works on mobile devices.
Choose one or two social media platforms to build a following and advertise your company. You don’t have to hire someone to update the accounts if there’s already an employee who’s savvy with social tech. Otherwise, you’re looking at least a thousand dollars each month for a freelancer or small agency.
To boost the SEO of your website, you’ll want to invest in content marketing. The monthly cost for a content marketing agency starts at $2,000. They’ll produce content such as blog posts or articles.
Use These Tips to Create Your Start Up Budget
Startups should be careful with what they spend from the very beginning. A start up budget specifies and tracks where money is coming from and what you’re spending it on.
Multiple budgets show where your company could possibly end up. They prepare you for the best and the worst.
Create your budget with the help of these seven tips, and then check out more start-up and small business tips to help you be successful.