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-byStep
Identify Start-up Expenses: Key Points your work on paper or online using a Document
A budget is only as good as the estimates that go into creating it. You can maximize the accuracy and usefulness of your first-year budget by building a comprehensive list of start-up costs for your business. 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. Why Identify the specific cost items and dollar estimates 1. Do a First-Year Budget? 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 Action 2: Identifydetermined through practical research -- telephone calls, cost figures she used were Monthly Operating Expenses 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 small business. Projecting yourat identifying what her start-up expenses clearer be Here is Amy's first attempt monthly operating expenses gives you a would picture of what it will takethe sustain your businessnew business: during to initial 90 days of her financially. 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 business Theseout that the cost ofstarted: them pointed steps will get you developing an initial training package was missing 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. Document your work on paper or online using Identify Monthly Operating a 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. 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 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 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 fiscal restraint in operating your business. Asor other o Payments on business loans you add 1.
Identify Monthly Operating Expenses: Example
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. Forecasting your small business income involves a lotof each are listed below: The specific cost items she identified and the details of guesswork. Unfortunately, that's just the nature of income forecasting. Since you don't have a crystal ball that can predict your future income, you need to take the time to complete thisAmy wanted to earn asa crystal ball either, but the business. Salary: This was the minimum amount action. We don't have her salary or "draw" from we can offer these action steps to take pay her share of living expenses, which she predictions: husband, Rick. Amy She would use this money to some of the guesswork out of your income split with her
Forecast Your Income: Step-by-Step
Forecast Your Income: Key Points
Forecast Your Income: Example
planned to pay herself $2,390 per month out of her business earnings. 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. 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 1. her budget and/or finalize your pricing. You may Confirm but included no costs for this entry. 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: How and bill for Does Your Forecastbe different Accurate each month. This may Have to Be? from how many units you'll sell or build. Forecast If you thought estimating expenses was a matter of 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 set your Confirm and/orthe unachievable 100 You may 1. expectations at finalize your pricing. percent Amy Hurt Forecasts Her Income mark. Focus instead on improving your accuracy by price by hour, by day, or by job/contract. Clarify knowingthe thing Amy Hurt ofandas well asTraining yourto your business inside Safety First your actual The first basis of your pricing, out. Understand did markether income forecast was to confirmat the price create and what you can realistically sell her fee structure prices. you've 4:Revisit your a Simple First-Year Budget Actionset.consulting and program delivery. quarterly and for safety Createmuch service (number of hours/days 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 interviews,plan to use each forecast asmay be different and bill for each month. This a learning Finally, and needs assessment surveys. For this work are now ready to calculate your expected profit or loss -- something every new entrepreneur is she charged $175 per hour. Her program fees werebusiness from how many service projection? What $35 per experience. How close was your hours or jobs you sell or student schedule. Forecast what you'll be able to invoice hour. didn't come in and why? What other factors impacted your forecastknewhow can you projectionsinto accountto be and her income take Amy for month by month. these were going to improve so she tried to make those guesses based on some guesses, future forecasts? 3. Tuning month, reasonable assumptions: multiply the amount of service Fine For each Your Pricing (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 a Simple First-Year Budget: Key 1. Add up your start-up expenses, category by Points
_________
Create your first year budget by taking your projections from the previous three Actions and inserting total expense and income numbers as indicated below:
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
Create a Simple First-Year Budget: below: If3. Insert the difference is a positive the year below. Example Total Income fornumber, that number
_________ Calculate your first-year budget using the formula
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 Before you get discouraged (Total Income - Total expected Profit/Loss. over your first-year budget projections showingProfit/Loss). Expenses = a loss, remember that this is not 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 forYourfirst year of Safety First to the first course Training. She used the income projections and look forin her start-up and information she had developed reasonable ways to: 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.