If you are the entrepreneurial type and are looking to create your business startup, you may be required to figure out a lot of things that you’ve never done before. One of the critical things to do is to create a business startup budget. This can be an intimidating task, especially if you are just starting out.
Most startups end up going down the drain because they do not have a budget, to begin with. There are various studies done that highlight the need to come up with a budget when starting their own business.
Although it may not be the most exciting part of starting a business, it is one of the most critical aspects of successfully getting it off the ground.
Read this article to understand the necessary steps that are involved in coming up with a budget for a business startup.
The Importance of Creating a Business Startup Budget
Of course, before we begin, you need to have a thorough understanding of what start-up costs definition looks like. A budget includes coming up with an educated guess about the various future finances of your business. This should be done even before you register a company and go through the various formalities of the same.
This will help you in examining how much your company has to allocate for many months and assess the differences – something that can come in handy when making future financial decisions.
If you happen to have a few bad months, you can prepare to minimize expenses wherever possible. If business booms, you can know how much-calculated investment risk you can take and satisfy potential customers. A reasonable business budget can help your business benefit by:
- Keeping things efficient
- Pointing out leftover funds that can be reinvested
- Predicting slow growth and avoiding debt
- Knowing what will it take to become profitable
- Helping you control your business
That is why creating a budget is essential if you’re going to start own business. All these areas will ensure that your business is out of debt, profitable, and growing at a steady pace.
Step-by-Step Guide to Creating a Business Startup Budget
There are various small investment business models that you can make use of when coming up with a budget. Here we take a look at one such template that will clearly define all the things you need to do from the beginning.
Step 1: Knowing Your Revenue Sources
This is one of the most critical stages of creating a business budget. Add up all your income sources to know how much money can flow into your business monthly.
You need to calculate the revenue that comes into the business before expenses are deducted. Ensure that you are not taking into account the profit. It is all that is left after the costs are taken out of the equation.
When factoring in the income, ensure that you do this for all 12 months. This will allow you to know the exact startup investment that you are making, and also give you a fair assessment of how your income changes over time.
Once information over 12 months is collected, it is possible to quickly gauge projected revenues over the next 12 months or even beyond. This is because 12-month information is likely to provide a great deal of information about seasonal patterns.
Such knowledge will help stay prepared for seasonal changes like leaner or surplus months. A business that has a good financial cushion is able to tide over several problems.
Step 2: Deduct Fixed Costs
Any cost that occurs regularly for the operation of your business is called fixed cost. You need to add these up and know the exact amount. These can occur daily, weekly, monthly, and even yearly. Some examples of this are listed below:
- Rent
- Taxes
- Insurance
- Payroll
- Debt Repayment
- Supplies
- Depreciation
Do take some time to know what exactly all your fixed costs look like. Know that your business startup fixed costs may differ somewhat from those listed here.
Step 3: Determine Variable Expenses
Variable expenses change over time. These are important to keep the business functional, such as utilities. Some of them are not necessary for your business to function, but may be useful to have still. Such expenses are known as discretionary expenses and they can be included under the variable expenses section. These can include the following:
- Salaries
- Utilities
- Office equipment
- Marketing costs
- Professional development
- Office supplies
At times of low growth, you can lower the variable costs of your business startup. On the other hand, during profitable months, you can increase spending on these for long-term benefits.
Step 4: Contingency Fund
You should also set aside some funds for a rainy day when the business is not as profitable, and unforeseen expenses arise. Ensuring that you have extra cash will take away some fear of unexpected developments. Most often than not, these unexpected expenses come at a time when it is most inconvenient.
It can be tempting to spend contingency funds on other areas, but it is best to refrain from doing so. Sometimes starting a business comes with its own set of costs that cannot be factored in, and having a contingency fund allocated for such times will ensure that you are well covered. It is possible to go with a small business loan, but multiple options are always better.
Once a budget has been created for emergencies, it no longer becomes an emergency since you are always able to sort out the issue.
Step 5: Profit and Loss Statement
Creating a profit and loss statement can bring up a lot of anxiety, but if you have covered the previous steps, it won’t be much of a problem. All that this step involves is some addition and subtraction. Add up the income and expenses, and subtract the costs from the income. As long as you have a positive number in the end, you shouldn’t have to worry much.
It is important to note that a small business startup may not be very profitable, or at all, in the first few months. Once you have created a P&L statement, you should also come up with future goals to pursue.
You can refer to the P&L statements to know the seasonal ups and downs. This will help you in knowing which investments are worth repeating and which can be foregone.
Step 6: Outlining the Future Business Budget
It is always educated guesswork to predict the future with a business. Even if a player has been involved in the business for a considerable amount of time, they will still be able to provide a rough estimate.
This rough estimate is never good enough when the going gets tough. There is a huge push towards getting an educated guess to work, but the big task of being able to put them in numbers should be done for a better prediction.
For example, users will be able to provide information about the seasonal ups and downs faced by an individual. This helps in identifying investments that are able to handle these ups and downs.
If there is a repetition trend, it can help avoid going with certain expenses. Some of the trends that shape up the P&L statement are:
- Equipment purchases that cause a profitable loss
- Seasonal problems like economic turmoil, natural disasters, and inclement weather
- Unexplainable profit or figures that are substantially higher in previous years
- Trends like supply limitations, tourist travel patterns, or school calendars
Understanding the most profitable months in a business will be able to predict future cycles.
A business owner can appropriately hire or sack employees based on the expected requirement. This helps in achieving a higher amount of efficiency.
Efficient Creation of Business Budget
Many business owners do not realize that it is rather simple to create a business budget or at least come up with the template. Some of the ways are:
- Purchasing a good accounting software to keep track of expenses and incomes.
- Managing budget by taking an accountant on board
- Breaking down business income and expenses to create a small budget and then build from there
- Downloading one among several business budget templates
If you require a good business model, you can even check out how some of the top cryptocurrency startups do it. The reason why they are so successful is that they have a good startup investment plan.
Or you can check other startups in the cryptocurrency or FinTech industries. They are good places to start.
Conclusion
There aren’t many small investment business owners you’ll meet who like budgets and finance documents. But this is one aspect that every successful business owner has to go through.
Knowing how to create a business budget and managing income and expenses is an efficient way of making the job of starting a business a little bit easier.
If you would like to share your own experiences with us, we are all eyes and ears. We also urge you to share any queries you may have so we can answer it promptly.
Don’t forget to like and share this article with anyone who may be looking to get his own business startup up and running.
