How to Create an Effective Start Up Budget
When it comes to start-ups, every penny should be a prisoner. This is especially so at the very outset of the endeavour, where financial planning can only take you so far and you must account for the all the unexpected costs that could well befall you before the business has even got off the ground. After all, nobody is pretending that starting a business – of any kind – is easy. Going by some reliable American statistics, over 20% of businesses fail in only one year – and that number rises to 50% by the fifth year. After a decade, 70% of businesses have fallen by the wayside.
Of course, it is not a complete mystery which costs a start-up will typically incur. Far from it. The sheer numbers of start-ups that have appeared over the last ten or twenty years has allowed us to build up a body of wisdom and practical advice that can inform your first budget at the outset of your own start-up enterprise. Start-ups, for example, are very often virtual businesses. This means that, from the off, expenses will be more in the realm of software, employment, and remote service. They are much less likely to revolve around things like office space, fire safety infrastructure, and computer hardware. You’ll be purchasing things like a virtual assistant or project management software, not ramps for disabled access or salt grit for snow and ice in the winter.
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Making the Money Stretch
If you are like the majority of start-up entrepreneurs, the chances are that you are not staring your endeavour with an endless supply of cash in the bank to see you through every pitfall. In other words, you will simply have to prepare a budget if you don’t want things to fall apart all but immediately – never mind after the first five years! Astonishingly, despite these salient facts, it has been estimated that over 61% of small business owners do not have an official budget. Now, that isn’t quite the same thing as having no budget whatsoever, but it does mean that these entrepreneurs tend not to have the fail-safes and bulwarks in place that can protect against sudden cash shortfalls.
For this reason, many start-up owners choose – instead of prudent financial planning – to engage in aggressive growth hacking strategies in order to achieve the greatest impact with the smallest amount of cash as possible. Sometimes this blitzkrieg approach can yield results, but there is no doubt these entrepreneurs are playing a dangerous game. We have no way of knowing for sure, but perhaps a good many of such entrepreneurs make up that bad half of businesses that fail after five years. It certainly wouldn’t surprise anybody.
Why Budgeting is Essential
With that in mind then, we can probably say for sure that budgeting is pretty much essential for all entrepreneurs embarking on their first start-up. Start-up budgeting needs to be regular and consistent, not simply done as and when it is felt to be needed. Here are some further advantages to the process:
- You will know when it is possible – not just essential – to invest in things such as new employees and equipment.
- You can avoid overborrowing and premature fundraising by investing on account of actual business data, not just vague projections.
- You can identify extra or retained earnings before they come in, meaning you can plan a use for them ahead of time.
- You can identify extra cash and likewise come up with a use for that. Most commonly, budgeting entrepreneurs assign this to emergency funds.
- You can create financial data sheets, featuring projections, income statements and expected shortfalls. This is a sure-fire way to impress upon investors a real air of professionalism.
And there is a good deal more – in fact, many – advantages to proper budgeting where a start-up is concerned. The principle behind it all is the advantage of being prepared and ready. With no budget, you may well engage in sensible business practices, but you simply will not have what you need to hand when things go wrong. Moreover, you will not be able to make best use of the extra revenue when things go right.
Steps to Creating a Start-Up Budget
So we are in no doubt regarding the utility – nay, necessity – of creating a start-up budget, and we know just what advantages it can bring, like accounting for every penny and being ready for the vicissitudes of the future. How do you actually make one though? Well, here is a rough set of steps that will put you on the right track.
Get Budgeting Tools and Set Targets
First off, you should come up with a rough idea of how much you want to spend every month and an estimate of your expenses. After that, it is time to gather the budgeting tools and input this data. You can always update it later, and this will give you a pretty good idea of how you will add things to your budget, which leads us to…
List Your Essential and Fixed Costs
These are the variables that you are going to add to your spreadsheet. Start-up costs can be divided into assets and expenses. These are the one-time purchases and the regular fixed expenses (rent and payroll, for example) respectively. Remember that the latter of these are tax deductible. As soon as you have determined these, you should add them to whatever financial planning tool you are using. The next step is to determine the fixed costs, which are the costs that will remain roughly the same every month.
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Estimate Your Variable Costs
Note the word “estimate” in this step. Variable costs can be tricky, which is why so many entrepreneurs tend to forget about them or simply pretend that they are fixed costs. In order to have something to add to your budget, consider contacting suppliers and providers to see if they have any data regarding these costs. In time, you can average these costs over a number of months and use this data. You should also remember that there can always be serious aberrations in this data. To really put a failsafe in place, you may wish to simply double all these costs to give yourself some leeway. If you do this, however, be sure to also include a figure at the end of each month for the difference between these figures and how much you actually spent. That can then be added to your cash reserves.
Calculate Your Monthly Revenue
So far, it has all been about costs. However, you should of course also include how much money you are bringing in every month. For the first couple of months, there is every chance this could be a negative figure. You should include it anyway as it will help you identify trends over time. You should also include projections – not just one, but two. The first should be an optimistic projection and the second a conservative projection. By including this data beside your actual revenue, you create performance reports and adjust overoptimistic/pessimistic targets accordingly.
As you can no doubt tell, a good start-up budget is all about being realistic about costs, realistic about the future and, ultimately, not wasting money.