The mind of an entrepreneur always revolves around money. Who is funding the business? How much funding do they have? How long can the business sustain itself on that amount? These are the types of questions a business owner thinks about daily. A startup has a limited budget where every dollar plays a crucial role. They must carefully navigate the business landscape by considering every factor while creating a startup budget. Whether you’ve not yet made an official budget? Perhaps you have made one but could use another checklist to make sure you have not missed anything? Then this blog is for you.
Startup budgets should consider various elements of business operations before being drafted.
A systematic approach while covering all the financial aspects of the venture is the way forward.
Consider Your Goals and Timeline
Before you start creating a budget, you must understand what your startup goals are and in how much time you wish to achieve them; that is the timeline you have set.
Business Plan
Your business plan forms the basis of your budget. Since it outlines the vision, mission, market analysis and strategy, your sales plan, and projected sales and growth, you can use it as a checklist for what your budget should consider.
Short-Term and Long-Term
A budget is made to measure expenditure across different time lengths. This is because a startup achieving their short-term goals will help them achieve their long-term goals. So, the period for which the budget is made (for example, a one year or five-year budget) is dependent on the business goals.
Identify Your Expenses
Every single cost to the business must be accounted for, as revenue will be spent on them.
One-time Expenses
Before making any sales, you will be setting up some type of office area or perhaps developing a website. These will be included in the one-time expenses incurred. They might be slightly expensive, but they are necessary for your business. Examples include office space/factory setup, the purchase of work equipment, the purchase of materials and other inventory, the cost of website development, and more. Ensure you have quotes from different vendors to have an accurate estimate of costs when accounting for them in the budget.
Fixed Costs and Variable Expenses
These will be a crucial part of your regular expenses, so you must ensure they are all accounted for.
Fixed Costs
These are the costs that are independent of your sales. They will be a recurring expense that will not fluctuate with the goods sold. Another name for them is overhead costs. It includes the cost of rent and utilities, salaries paid to employees along with benefits, premiums on insurance, the cost of any business licenses or regular subscriptions, loan repayments, and more.
Variable Costs
These are the costs that are dependent on your volume of sales. This includes the variable cost of production, which is known as the cost of goods sold (COGS) such as raw materials, manufacturing costs, piece-rate labor (if applicable), commission on sales, packaging and delivery costs. Other variable costs are advertising and marketing expenses, transportation, entertainment and activity costs.
Operating Expenses
This accounts for your day-to-day expenses.
Administrative Costs
They are costs exclusive of anything directly related to a core team, like production or sales. It is independent of the firm’s business function. The salaries of management, accounting, human resources, business registration, and legal fees are examples of administrative costs.
Contingency Plan
A firm can experience emergencies or other unexpected costs at any time. To be secure in such circumstances and maintain financial stability, you must keep aside roughly 10 percent of your total final budget. Thus, you can consider this at the end.
Estimate a Cash Flow Projection
Once you have your costs accounted for, you will require an estimated breakdown of the cash inflow and cash outflow. A business’s ability to maintain a positive cash flow, that is, when money coming in is greater than money leaving, is what determines its worth to investors.
Inflow of Cash
This would mostly include the inflow of cash through your sales and investments. Other sources can depend on the type of company. These can be any government grants or subsidies, royalties received, or prepayment by customers.
Outflow of Cash
This would include the outflow of cash through regular expenses. These can be capital expenditure, cost of research and development, repayment of loans, salary to employees, dividends to shareholders, and more. It is important for the business to have sufficient liquidity to cover its business commitments.
Additional Thoughts
Make use of tools and software for easier budgeting. Even a simple Microsoft Excel spreadsheet can help streamline the process and track all expenses. You can even ask for advice from various tax and financial consultants as required. You should, however, consult legal counsel to safeguard your company and make it compliant with relevant laws and regulations.
Conclusion
Keeping these considerations in mind will be necessary for drafting a budget. A startup cannot afford to make mistakes that are easily avoidable. Create a budget to improve short-term and long-term business success. Readily update and adjust the budget according to business needs and growth to ensure the business stays adaptive in an ever-changing environment.
