Each dollar counts in the early stages of a business. Unfortunately, if you’re like most small business owners, you’re starting with less than $50,000 in the bank.
Moreover, several startups engage in aggressive growth-hacking tactics to achieve the most significant impact with the least amount of money. That leaves little room for sloppy budgeting or unexpected cash shortages. However, according to one survey, 61% of small business owners do not have a formal budget.
Budgeting and forecasting can be tricky, so we’ve broken it down into a step-by-step process. First, create a budget that allows you to estimate your startup costs, track your cash flow, and stay lean from the start. You can use accounting software, a digital spreadsheet, or pencil and paper to complete these steps.
Before writing this article, I assumed that budgeting was an integral part of every business process. Yet, according to a survey I came across, 61% of small businesses don’t even have a budget! Fortunately, I’ve laid out a step-by-step guide to budgeting for your startup, whether you’re using software, spreadsheets, or pen and paper.
This is what I have for you today:
- Why is budgeting critical to the success of a startup?
- How to Make a Startup Budget in Easy Steps
- How do you deal with budgeting issues?
What good is a startup budget if you can’t afford it?
A startup budget is a clear and concise division of how you intend to spend your money and cover expected business expenses. A budget is essential for any tech startup, whether it’s pre-revenue or later-stage.
A budget is the most effective way to figure out how much money you’ll need to get through the first few months before launching your startup. It will be a reasonable projection based on market research and your best guesses at this point. You may run out of money too soon or spend it inadequately if you don’t have a plan in place.
Your budget becomes an analytics tool once you’re up and operating. You can see how you’re allocating resources in real-time and whether your team is spending and earning the way you planned. This allows you to ask important questions and identify cost-cutting and business investment opportunities early on.
- Is every channel funnelling high-quality leads, for example, if paid advertising is your most significant expense category?
- Is it necessary to agree to longer payment terms to free up funds during slow months?
- Is your spending truly in line with the key performance indicators (KPIs) of each team?
Budgets that are well-crafted give direct results or point you in the right direction.
Why is budgeting so crucial for a startup’s success?
You’re probably aware that creating a startup budget serves a purpose other than preventing business setbacks. It aids in making well-informed and well-planned business decisions, which is why it is frequently regarded as the most crucial step in business operation. However, there are many more reasons for you to set aside time for budgeting as a startup owner.
Let me give you a few examples:
- It gives you an idea of when you should hire people.
- You can finance to scale with a regular budget and real-time business data. This prevents over-borrowing and early fundraising.
- A more accurate estimate of your break-even point so you know when to make necessary adjustments.
- Predicting cash shortages becomes more precise, allowing you to allocate funds accordingly.
- Produce accurate financial statements to present to investors or lenders.
Make a startup budget in easy steps.
You don’t have to estimate costs to the tenth of a cent or predict the future to make a helpful startup budget. Market research, competitor study, and vendor quotes are common ways for a new company to determine sums. Some of these figures may already be in your possession due to your research and development efforts.
One of the crucial things to remember is to keep your assumptions and projections conservative. For example, it is preferable to underestimate revenue and overestimate expenses rather than the other way around.
Let’s look at determining your revenue and expenses, analysing the data, and making changes immediately.
Step 1: Gather your resources and set up a budget.
You can make your startup budget by hand in a notebook. Alternatively, use the budgeting features in popular business accounting software to expedite the process. In addition, your general budget will get updated automatically if you integrate your other financial tools, such as your business bank account. So there’s no need to sort through each app to figure out how much money you’ve spent every month.
Spreadsheet programmes such as Google Sheets or Microsoft Excel are another user-friendly budgeting alternative. In any event, there are numerous free startup budget templates to choose from. Choose one with an easy-to-use interface and the timeline you need.
To test the formulas, enter a few numbers into the spreadsheet. You won’t waste time entering hours of data only to discover the spreadsheet isn’t working.
Setting a budget goal in advance can help you keep on track when adding your must-haves and nice-to-haves. Also, remember to include a little emergency fund in your budget. Experts advise keeping at least three months’ worth of cash on hand. Budget everything you can for contingencies, even if it seems out of reach at first.
Entrepreneurs start with expenses when budgeting because they’re the easiest to forecast. So let’s get started then.
Step 2: Make a list of your startup costs.
Startup costs are the expenses and assets you purchase before launching your business. These are the most important purchases—the things you’ll need to get your business up and running and start selling.
You’ll need to budget for two types:
- Startup expenses: One-time purchases of liquid and non-liquid assets such as inventory, computers, furniture, vehicles, property, and security deposits are known as startup assets. It’s important to remember that startup assets, also known as capital expenditures, aren’t tax-deductible.
- Startup costs: These are the fixed or variable costs you incur before you open your business.
Office space, organising fees, trademarks, and patents are all examples of startup costs.
For instance, you won’t pay a lump sum for “website costs.” Instead, make a separate list for a web domain, content management system, online shopping cart, design, and images, as well as anything else you might require. Then look at the average price range for expected startup costs.
Step 3: Figure out what your fixed costs are.
The next step is to figure out how much your fixed costs, also known as overhead costs, will be. These are monthly business expenses that are essentially the same.
Monthly costs for a new business could include:
- Rent or buy a house?
- Salary and benefits packages
- Insurance for businesses
- Internet and phone services are provided in addition to website hosting.
- Services provided by professionals
- Bank charges
Don’t forget to set aside money for each fixed cost’s spending. If you choose an in-house social media specialist, for example, you’ll need to pay them more than just a salary and benefits. They’ll need office supplies like a desk, laptop, and marketing software for the job. More examples of fixed costs can be found in this list of business expense categories.
Step 4: Calculate your variable expenses.
Variable expenses fluctuate in response to your sales and production, so they rarely have a fixed monthly cost. These costs tend to rise as you scale up and vice versa.
Variable costs can be seen in the following examples:
- Supplies of raw materials
- Spending on advertisement
- Utilities \Equipment
- Costs of shipping
- Taxes on business income
- Transportation
- Events and travel
- Services provided by freelancers
New business owners can get quotes from manufacturers, contract workers, and third-party logistics providers (3PLs) for many of these costs. Alternatively, you could use industry averages. Take into account how the time of year and season affects each cost.
Round up both fixed and variable expenses to give your budget some breathing room. For example, if a subscription service costs $17.26, you could set aside $18-$20. Some experts recommend doubling or tripling estimates for categories that fluctuate, such as marketing and advertising or legal services.
Step 5: Figure out how much money you’ll make each month (Total Revenue).
Following that, you must forecast your earnings for each source of income. It’s best to make at least two sets of revenue projections if you don’t have previous sales data for your company: an optimistic projection and a conservative projection.
Estimate how frequently your customers will buy your goods or services using your customer personas. Consider your total addressable market, potential market share, and current market conditions, among other things. Then, using your break-even analysis, you can calculate a monthly sales estimate. Be realistic about any factors that may stifle revenue growth every month.
A list of possible revenue and funding sources follows:
- Sales of a product or service
- Credit card for a business or corporation
- Loans
- Income from investments and savings
Let’s see if your startup and operating costs are in line with your initial intended budget.
Step 6: Stack up all of your expenses, then review and adjust.
Estimate how much you’ll need to get started by entering your monthly cost estimates into your business budget template. Hopefully, you’ve budgeted for overspending and contingencies.
In the initial months of a new business, it’s normal to expect some deficit spending. However, if your budget goal sounded much better on paper, you can make changes before borrowing more money.
Go over your expenses again and categorise them as necessary (must-haves) or discretionary (optional) (nice-to-haves). Then, starting with discretionary costs, determine which costs you can eliminate, reduce, or save for later.
Is it possible to get by without using a project management tool or to use the free plan? Is it vital to hire a public relations (PR) consultant during the early stages of your business? Is it possible to start in a coworking space with used office equipment?
Conclusion
Budgeting is essential for a successful startup, as it is for any other process. First, we’ve discussed the importance of having a stable budget for a startup and the various budget options available. Then we learned a lot about the steps you should take to create a startup budget. Finally, we discussed the difficulties you may encounter when creating a budget and regain control of the situation.
The best part about budgeting for a startup is that you can try out hundreds of various trends to see which ones work best for you. Then, to achieve financial balance throughout the year, concentrate on the financial practices that best suit your company’s needs.