By Luke Loftin
As the old saying goes, “In order to make money, you have to spend money.” But you have to know exactly how to spend the money—the goal, the strategy, whether it’s a good deal, and whether or not you can afford it.
In short, one of the fundamental keys to business success, or even getting your venture off the ground, is creating and maintaining a startup budget. Budgeting for your business can be pretty complicated, but with the help from this guide, it doesn’t have to be. Let’s get started.
1. Assess the Costs of Your Startup
What would it take to launch your business? This could be to open the doors in order to start seeing customers. Or having an operational website that accepts orders. Whatever your business is, you want to assess how much money you need to actually start. This is your “day one” budget.
Here are some categories that will be useful for you to budget out:
- Facilities Costs – If you have a brick and mortar business, it will need a location. So figure out how much your rent would be, or how much it would cost to buy the property. Then you have to go deeper and budget out the cost of setting up the space, for example: turning it into a store, remodeling it into the restaurant of your dreams, making it over into a doctor’s office. Or, it could be something less daunting like the cost of a WeWork membership if that’s all you need. Facilities costs are all the money you need to utilize the space for your business.
- Fixed Assets aka Capital Expenditures – If you have facilities costs needed to start your business, you will probably have capital expenditures as well. These include the furniture you will need to decorate your office or restaurant, as well as equipment like computers or an oven.
- Materials & Supplies – This versatile category encompasses things like office supplies and other items needed to operate your business. For example, if you’re a clothing designer, your budget for fabric would go here.
“First, I think it’s important for small business owners to keep things simple when creating their first budget,” says Matthew Ross, Co-Founder & COO at The Slumber Yard. “There’s no need to get overly complicated and break-out every single line item. In my experience, the whole process can start to get quite overwhelming if you start to get too far into the weeds. Instead, try to bucket line items into larger groups and then project them out. For example, instead of splitting out meals, entertainment, and travel into individual line items, group them together and project them out as one.”
Still, it’s advised that you spend a considerable amount of time imagining all the expenses you might encounter, ahead of time.
“By far the most important thing for setting up a budget is a good cost estimate,” says Igor Mitic, Co-Founder of Fortunly.com. “People often overlook certain smaller costs such as office material, shipping, marketing costs and many more. These may look minor, but when they add up, they can seriously affect your budget. In that sense, step one is making a clear list of all of the fixed costs as well as variables. Make sure to write down every tiny thing that comes to your mind, and include that in your budget.”
2. Estimate Monthly Expenses
- Fixed expenses are any expenses that are recurring every month without any fluctuation. These are items like rent, cell-phone or landline plans, website service fees, equipment lease payments, dues and subscriptions, retainers paid to PR firms, and business insurance, just to name a few expenses.
- Variable expenses are items or services you need to purchase to run your business but don’t recur with any regular frequency or fluctuate based on various factors. Common variable expenses include things like shipping costs, restocking office supplies, raw materials, and production costs.
“I think one of the main struggles that startup founders face is that they don’t actively look for ways to save money,” says Calloway Cook, Founder of Illuminate Labs. “This sounds ridiculous, but they’re so focused on solving the business problem that they tend to ignore ways to be frugal which can increase the likelihood that the business survives the pre-revenue period.”
3. Estimate Monthly Revenue
The good thing about knowing your estimated monthly expenses is that it sets your first financial goal as a business owner: you have to make that amount of money just to break even.
However, estimating your monthly revenue is the most difficult part of creating your budget. In most industries and businesses, it’s impossible to know exactly what your sales will be like for a given month. Service-related businesses might have clients on retainer. A restaurant might be able to estimate an average amount of revenue that will be pulled in on Sunday brunch. Tax preparers can expect the first quarter of every year to be their most busy. But for the most part, you won’t completely know what your revenue will be like for the month until after the month is over.
This is compounded by the fact that the money generated from a sale or service will not be collected immediately.
For example, if you estimate that sales for a particular month will be $20,000, and you will only collect 80% of the amount that month, your cash balance for this month will be $16,000. Unfortunately, your monthly revenue is bound to fluctuate, and you might not see a pattern or rhythm to this fluctuation until you have been in business for at least a year. For those entrepreneurs just starting out, stay diligent in estimating what your revenue will be each month and study your numbers deeply to understand why you made more or less money than you thought.
4. Make a Cash Flow Statement
Your cash flow can best be understood as the amount of money you have going into and out of your business every month. It’s imperative that you pay attention to this in order to keep your business running smoothly.
In many ways, cash flow can be more important than profit. As you read above, you might generate sales for a given month but not be able to collect the payment for 30 or 60 days or more. If you make $100,000 in sales in one month, that’s amazing. Especially if your combined fixed and variable expenses are only, say, $25,000. But if you’re not able to collect that $100,000 within the next 30 days, you will definitely have bills coming due before then. And if you don’t have any money saved, how will you pay the bills?
“Startups take time, no doubt about it,” says Ben Watson, virtual CFO of DollarSprout.com and founder of Fiscal Fluency DollarSprout.com. “While you are building your products or promoting your services, it’s likely you’ll have some dry spells where cash is tight. This is an important time to have some cash available to make sure the lights stay on. Most experts recommend having 6-12 months of emergency cash saved up to float you while you pound the pavement. This is great advice, but remember that the lower your overhead, the longer the runway you have, so keep a close eye on expenses that aren’t necessary.”
While loans for working capital can help you get through months where cash is tight, it’s better not to be caught off guard.
“I would suggest reviewing performance on a monthly basis,” advises Ross. “Don’t wait until the end of the quarter or the end of the year. By comparing actual performance against your original budget every month, you can see how/why your business is missing the mark and make timely adjustments.”
The Key to Creating a Business Startup Budget
Always, always, especially when starting out, estimate your expenses high and your sales low. This will keep you vigilant about looking for deals and discounts wherever you can on your expenses, and motivate you to keep going after sales and generating revenue.