Building Your Start-up Budget
Preparing a small business budget can be intimidating, even to the most fearless among us. But
if you take the time to do your budget right, managing your fiscal responsibilities will be simpler
and less stressful in the long run. While a solid budget is no guarantee that your business will be a
financial success, it will help you to realistically project how and when you will achieve your
financial goals.
In this milestone, you'll learn to:
Action 1: Identify Start-up Expenses
Action 2: Identify Monthly Operating Costs
Action 3: Forecast Your Income
Action 4: Create a Simple First-Year Budget
Action 1: Identify Start-up Expenses
Projecting start-up expenses is a small business challenge that makes most entrepreneurs
squirm. Why? Because the budgeting process takes us away (momentarily) from the more exciting
aspects of entrepreneurship -- creating work we love, exercising our independence, achieving our
goals. Yet there is nothing that can deflate our entrepreneurial spirit more than unexpected
expenses and insufficient cash. To minimize these hassles, you need to define a realistic start-up
budget.
In this action, we'll help you project realistic start-up expenses for your business. Simply follow
these steps:
Identify Start-up Expenses: Step-by-
Step
A budget is only as good as the estimates that go into
creating it. You can maximize the accuracy and usefulness
Identify Start-up Expenses: Key
of your first-year budget by building a comprehensive list of
start-up costs for your business.
Points your work on paper or online using a
Document
spreadsheet. Depending on your situation, you may have
only a few items for some categories and an entire page or
spreadsheet for others. Your estimates don't have to be
perfect, but they should be as realistic as possible. This
exercise may take several hours or several days; the
important thing is that you stick with it until you have
identified all start-up expenses.
1. Do a First-Year Budget?
Why Identify the specific cost items and dollar estimates
for the own business can be one of the biggest
Starting yourfollowing start-up expense categories (not
all categories you'll ever make. business). Do
financial investments will apply to your You might be not
include monthly operating expenses here; no time
surprised to learn how many people spend little or these will
be covered will cost 2 start their new business.
researching what it in Actionto of this milestone.
They may be so focused on their personal reasons for going
Note: Each of they love, becoming more
into business -- doing a jobthese categories is defined
in detail in the Key Points section the
independent -- that they completely forget aboutfor this
businessAction. and managing money.
of making
Maybe you've heard friends or colleagues report that
Identify Start-up Expenses: Example
Amy Hurt Projects Start-Up Expenses
Amy Hurt of Safety First Training began to develop her start-up budget by
identifying the initial investments needed to get her business off the ground. The
cost figures she used were Monthly Operating Expenses
Action 2: Identifydetermined through practical research -- telephone calls,
visits to office supply stores, conversations with vendors, Web site visits, and
Have a good handle on your small business start-up costs? Great! Now it's time to focus on
discussions with other small business people she knew.
your monthly operating expenses -- those day-to-day costs you incur when running a successful
Here is Amy's first attempt monthly operating expenses gives you a would picture of what it
small business. Projecting yourat identifying what her start-up expenses clearer be
during to initial 90 days of her financially.
will takethe sustain your businessnew business:
Take the time necessary to uncover the obvious and hidden operating expenses for your
Amy reviewed her start-up expenses with a few friends and colleagues. One of
them pointed steps will get you developing an initial training package was missing
business Theseout that the cost ofstarted:
from the list. Amy added in these costs.
Identify Monthly Operating
Expenses: Step-by-Step
In Action 1, you identified your one-time start-up
expenses. In this Action, you'll look at what it will cost each
month to operate your business.
Identify Monthly Operating a
Document your work on paper or online using
spreadsheet. You may find that you have only a few items
Expenses: Key Points others. Remember,
for some categories and dozens for
estimating a budget is a time-consuming process, but the
peace of mind you'll gain by having a realistic view of your
monthly operating expenses is well worth the effort.
1. Identify the specific cost items and dollar estimates
for the following monthly operating expense
categories (not all categories will apply to your
business).
Why Do a Monthly Operating Budget?
Note: own of these categories is biggest
Operating yourEachbusiness can be one of thedefined
Identify Monthly Operating
in detailyou'll ever take on. For your business to
financial projects in the Key Points section for this
succeed,Action. anticipate what it will cost to operate
you must
Expenses: Example
each month. How else can you ensure you will have the
cash on hand when you need it?
o Your salary
o Other salaries
The worst-case scenario--not being able to pay bills or
o Your benefits
employees on time--can kill a small business, even if it has
o Benefits for employees
enormous potential for success.
o Taxes
o Rental/lease payments
Differentiating Between Needs and Wants
o Utilities and telephone
As with start-up costs, it's important to practice some
o Professional services
o Payments on business loans you add
fiscal restraint in operating your business. Asor other
Amy Hurt Projects Monthly Operating Costs
After estimating start-up costs, Amy Hurt of Safety First Training turned her attention to projecting monthly
operating expenses. This would tell her how much money was needed to run her business monthly and quarterly
Action 3: Forecast Your Income
for the first year of Safety First Training.
The specific cost items she identified and the details of guesswork. Unfortunately, that's just
Forecasting your small business income involves a lotof each are listed below:
the nature of income forecasting. Since you don't have a crystal ball that can predict your future
Salary: This was the minimum amount action. We don't have her salary or "draw" from
income, you need to take the time to complete thisAmy wanted to earn asa crystal ball either, but the business.
She would use this money to some of the guesswork out of your income split with her
we can offer these action steps to take pay her share of living expenses, which she predictions: husband, Rick. Amy
planned to pay herself $2,390 per month out of her business earnings.
Forecast Your Income: Step-by-Step
Networking Expense: Amy planned to make regular investments in lunches, breakfasts, and nicely
packaged copies of articles she would send to people in her network. Her plan was to spend an average of
$25-$50 each week, or up to $200 a month, on networking.
Cell Phone: Amy purchased a monthly package of services with her cell phone that costs $49.95/month.
Answering Service: Her basic plan costs $15.00 a month.
Fax Phone Line: Her fax line would cost her about $29.50 each month.
Quarterly Tax Payments: Amy knew she had to account for quarterly tax payments in her budget, but
she wasn't sure exactly how much to plan for. She decided to complete the other items in her operating
budget and confer with an accountant to better understand exactly how to handle this item.
Take time to figure out howplanned on $50 you month for office supplies.
Office Supplies: Amy much business per
Automobile Expense: Since she had included her monthly car payment as a salary cost item, Amy used
realistically expect to bring in (and get paid for) during
this category to cover car insurance, in forecasting
your first year of business. Be conservativefuel and maintenance. She budgeted $250 each month.
Forecast Your Income: Key Points
Journals/Magazines/Newspaper/Association Fees: Amy wanted to keep up with the latest in her
income; list only the income you feel reasonably sure of.
field, so she budgeted $35 each month to cover the expense of two subscription journals, her local
If you are forecasting income from products, do the
newspaper, and her training association membership.
following:
Retirement: Amy knew she wanted to contribute regularly to her retirement account, but she wasn't
certain how much she could put into the account in the early days of start-up. For now, she left this item in
Confirm but included no costs for this entry.
1. her budget and/or finalize your pricing. You may
price per unit, per batch, or per run. Clarify the
basis of your pricing, as well as your actual prices.
When she had completed her list, Amy put the items into a spreadsheet and reviewed it with her husband. A
2. Forecast how much product you expect to deliver
partial view of that spreadsheet is shown below:
Accurate each month. This may Have to Be?
How and bill for Does Your Forecastbe different
from how many units you'll sell or build. Forecast
If you thought estimating expenses was a matter of
Forecast Your Income: Example
what you will be able to invoice for month by
educated guess work, wait till you try forecasting income.
month.
All businesses, from the smallest start-up to the largest
3. For each month, multiply the amount of product
international corporation, must forecast income on a
(from Step 2 above) by price (from Step 1 above) to
regular basis. It's always a guess. Experience and in-depth
calculate the projected income for that month.
knowledge of the business and its market can dramatically
improve forecasts, but nothing short of a crystal ball can
If you are forecasting income
ensure 100 percent accuracy. from services, do the
following:
As you make forecasts for your business income, don't
1. expectations at finalize your pricing. percent
set your Confirm and/orthe unachievable 100 You may
Amy Hurt Forecasts Her Income
mark. Focus instead on improving your accuracy by
price by hour, by day, or by job/contract. Clarify
The first basis of your pricing, out. Understand did
your business inside Safety First your actual
knowingthe thing Amy Hurt ofandas well asTraining yourto
create and what you can realistically sell her fee structure
markether income forecast was to confirmat the price
prices.
you've 4:Revisit your a Simple First-Year Budget
for safety Createmuch service (number of hours/days
Actionset.consulting and program delivery. quarterly and
2. Forecast how forecast monthly or Her
adjust accordingly.
consultative work included program design, client
or work you've done in Actions 1 through of this
All the hardnumber of contracts/jobs) you expect to3deliver milestone are about to pay off. You
Finally, and needs assessment surveys. For this work
interviews,plan to use each forecast asmay be different
and bill for each month. This a learning
are now ready to calculate your expected profit or loss -- something every new entrepreneur is
from how many service projection? What $35 per
she charged $175 per hour. Her program fees werebusiness
experience. How close was your hours or jobs you sell or
hour.
student schedule. Forecast what you'll be able to invoice
didn't come in and why? What other factors impacted your
Amy for month by month. these were going to
and her income take
forecastknewhow can you projectionsinto accountto be
guesses, future forecasts?
improve so she tried to make those guesses based on some
Fine For each Your Pricing
3. Tuning month,
reasonable assumptions: multiply the amount of service
(from Step 2 above) by price (from Step 1 above) to
eager to know. In this action we'll give you a simple formula for calculating profit/loss and offer
some suggestions for how you can minimize a negative financial outcome and maximize a positive
one.
Create a Simple First-Year Budget:
Step-by-Step
Create your first year budget by taking your projections
from the previous three Actions and inserting total expense
Create a Simple First-Year Budget:
and income numbers as indicated below:
Points
Key 1. Add up your start-up expenses, category by
category. Then add the totals for all categories and
insert that total below.
_________
2. Total your monthly operating expenses for each
month. Then add all monthly totals and insert that
total below.
How to Calculate Profit/Loss on Your Own
_________
Calculate your first-year budget using the formula
Create a Simple First-Year Budget:
below:
Example Total Income fornumber, that number
the difference is a positive the year below.
If3. Insert
represents the projected profit. If the difference is a
_________
negative number, that number represents the projected
loss.
4. Subtract Budget Shows a Loss?
What if YourTotal Expense (add lines 1 and 2 above)
from Total Income (line 3 above) to get your
expected Profit/Loss. over your first-year budget
Before you get discouraged (Total Income - Total
Expenses = a loss, remember that this is not
projections showingProfit/Loss).
uncommon for a start-up. Nor is it a sign of financial
incompetence if you have to "tweak" your budget. Even
A positive outcome represents your profit. A negative
Amy Hurt Creates a First-Year Budget
financial experts have to adjust of investment
outcome represents the amounttheir budgets. or funding
Amy was ready toeven.
calculate expected profit or loss
you'll need to break of action isher review your expense and
the first course
forYourfirst year of Safety First to
Training. She used the
information she had developed reasonable ways to:
income projections and look forin her start-up and
monthly expense projections and income forecast. Her
Decrease your
results are as follows: start-up expenses
Decrease your monthly operating expenses
Total Expenses for the Year
Increase your monthly income
Profit/Loss
Once you're comfortable that your projections are as
Adjusted Net Income
realistic as you can make them for now, your next course of
Because consider additional investments you include
action is to she projected a profit, Amy needed tocan make
estimated quarterly tax payments in her operating expense
to cover the loss. Do you have financial resources you can
budget. With the fund the difference so your business
use to personally help of her accountant, Amy determined
that she needed to set aside $3,082 per quarter for
breaks even?
estimated tax payments. These tax estimates totaled
Your for course (4 times $3,082), so Amy subtracted
$12,328finalthe yearof action is to consider acquiring
outside funding. You can find out more about outside
this amount from her previous net income projection.
funding options in Milestone 10: Planning Your
Looking at this final number, Amy realized that she
Investment and Funding Requirements.