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Preparing a Business Budget

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					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.

				
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