How Do Startups Plan Their Budgets?

How to budget your business so well that your parents will be proud!
by
Finance
December 27 | 10 min

Before you break the bank or become stingy, you need to know that managing the budget for your startup is an essential part of creating a business plan. Proper budgeting includes more than figuring out where the next payroll is coming from. According to Victor Butcher of Butcher Financial Services, your budget plan serves as a “roadmap” for understanding where your business is headed. It is essential to create a plan that tracks the income and expenses of your new business and forecasts the funding you may need.

Budgeting the expenses necessary to generate income is the first step to earning profits — effective budget plans consider both long-term and short-term needs. According to Start Your Own Business, a book written by the staff of Entrepreneur.com, the most effective financial budget considers short-range, month-to-month planning for at least one year, as well as long-range, quarterly planning for at least three years. Basically, establishing a budget allows you to determine how much money you need for production and operations, how much you have to start with, and how much you will need to eventually earn a profit.

To kickstart your startup’s business plan, ask yourself these questions:

  1. Where exactly is your capital going?
  2. How much does your business need to spend in order to profit?
  3. What is the amount of profit necessary to reach “success?”

You may want to hire an accountant to consult with if you aren’t a finance person and don’t want to do it yourself. Your accountant will stop you from buying unnecessary things you think will look cool in the office space. Familiarize yourself with the components of the budget and begin to plan one for your specific business.

Questions to Ask Yourself throughout the Early Stages of Your Business:

  • Does your Business Involve Manufacturing Products?
    Depending on the type of products and services your startup sells, you will have to determine how much you will spend for production, manpower, and other resources. For cost of goods sold, you will need to calculate the actual costs associated with producing each item on a percentage basis. You will also need to determine the pricing model you will be using, as well as how much inventory you are planning to keep.
  • Does Your Business Have a Physical Store or Require a Work Space?
    If you decide to operate a store location or hold office somewhere, consider rent, lease fees, utilities, tenant fees, signages, and other fixed assets that you will need to spend on. Think about the operating expenses that will be required if you posses any property equity, as well as the business insurance you may need.
  • How Much Can My Business Make in One Year?
    Determine a projection of your annual sales and be able to plan your monthly revenue.
  • How Many Employees Will Your Startup Need?
    Can your startup afford to hire more people? Take into account the expenses required to hire permanent or contractual employees as well as the possible profitability of those you hire.

Plot Your Fixed and Variable Expenses
Establish your budget by categorizing each expense as “fixed” or “variable.” Fixed expenses are those dreadful payments that need to be made every month. For example, these could be leases, business loans, utilities, subscription costs, or anything else that is recurring and essential to the day to day operations of your business.

Variable expenses are those which depend on the volume of sales, transactions, and other costs that could fluctuate from month to month. For example, these could be seasonal offers, special promotions, advertising, employee bonuses, contractual salaries, or contingency funds.

You do not necessarily need to pay for these expenses on a monthly basis, but it is still vital to keep tabs on where your money is going. While plotting your fixed and variable expenses, you can also sub-categorize them by type: manpower, production, real estate, equipment, etc. As a startup, you have little to no funding or profit (yet) so it is essential to keep your expenses low. Try to be smart about your expenses — only spend what is necessary, especially during the first few months of your startup (don’t worry, you can spend more later).

Estimate Your Monthly Sales
While running a startup, it can be difficult to pin down your profits, especially when you have little or no data to back things up. Wish it could be as easy as guesstimating? This is where sales projections come in. The Balance Small Business suggests that business owners make projections based on the best possible scenario (an optimistic estimate on possible sales), the worst scenario (estimate of slow sales performance), and the likely scenario (an in-between sales estimate) for your first year. Establishing at least three sales projections prepares your startup for the future — though uncertain, these projections can help keep you one step ahead of possible failure.

Create a Profit and Loss Statement
Also referred to as an “income statement,” your profit and loss (or P&L) statement shows your startup’s net income based on the difference between your revenue and your expenses. If you have already been in business for awhile, then you should save those P&L statements to see your startup’s profitability and help you apply for business loans. Your income statement will also check the health of your business and serve as a tool for tax preparation. A P&L includes details such as a time frame month-to-month, quarter-to-quarter, and year-to-year.

Make a Balance Sheet
Your balance sheet will help organize and predict the levels of assets, liabilities, and equities of your startup based on your income statement. It essentially illustrates a company’s resources, debts, and ownership for a given period. A balance sheet acts as a master file to check if your projected budget and expenses add up at the end of the month or year. It also acts as a support to track if your spending and earnings are on the right track — your balance sheet will help you plan your budget for the following month or year.

Create a Cash Flow Statement
Creating and maintaining a cash flow statement helps business owners and possible investors answer questions, such as whether or not operations are generating revenue. This will help you understand how the money you put into your business moves. Tally the total amount of expenses since you started, breaking down your inventory by category and revenue generated. Once inputted in your template, you will find your cash balance. This part is important if you plan to apply for a business loan, as the amount of money that lenders are willing to provide depends on the income that your business generates. A cash flow statement provides transparency about how your money is moving and whether or not you are generating greater gross profit than loss. Keep tabs on your cash flow statement monthly to see where you need to make adjustments, if you will need to adjust your targets for the next month, or if you need to take out another loan for the growth of your startup.

Begin planning your master budget by carefully examining what it takes for you to run your business — take note of all expenses. Get rid of any expenses that are not essential at this stage. Create several projections of your net income and gross profit to gather an idea of where your business could be in the next few months. It is safe to expect high expenses in the beginning, with one-time investments such as computers or other equipment, but you should also expect income to be relatively low due to the novelty of your business. Keep tabs on your profits and losses, balancing them to see the gaps in your cash flow, and you will have a clearer picture of your startup’s potential for growth. Establishing a clear and concise budget allows you and your team to have a clearer view of your business and serves as a basis for profitability in gaining financial support. Due to lack of experience and data, it is difficult for startups to make smart assumptions about how much money is necessary for growth. However, once you get started, planning for the future becomes much easier and soon you’ll be making money moves!

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