No matter if you’re a store owner or the CEO of a fortune 100 company, “Budgeting” is one such term that brings every business owner to their feet. But, what if we told you that over 65% of startup businesses aren’t fully confident about the proper allocation of their money?
Yes, there are a significant number of startups that lack adequate budgeting practices! Creating a budget for business is a complicated process, even more, if your business is a start-up.
Interestingly, it isn’t only about allocating your resources. There are numerous factors that come down the list when you’re budgeting. Creating an effective budget isn’t only about allocating the correct sum to continue seamless operations, but also estimating costs of operation, monitoring the cash flow, and scaling your business with time.
Step by Step approach
- Brainstorm to figure out the potential costs
Brainstorm to think and curate a list of every potential item that will be required to start and develop your business in the first phase (at least a year). The list will Include some primary items like rent for the office space, payroll costs, equipment costs, patents, and marketing, trademarks, and expenses incurred on sales.
To help you further decrypt the potential costs, here’s an overview:
- Get granular:
While brainstorming your potential costs, be very specific about the things you need, adding clarity to every single object on the list.
- Mention the costs associated for individual line items:
While you are listing the potential costs of operations, don’t confine it to a month or two. Instead, ensure that every line item is covered for at least a year of operations (if not more). Further, be a bit generous about the cost of such items. Remember, allocating extra funds for a line item is always a smart thing to do.
- Cushion your budget:
Padding your budget helps secure your startup against shortage of funds. Being a startup, consider securing at least 10% of the budget for emergency circumstances. Further, startups often underestimate the total costs of business operations. Don’t forget to include areas such as:
- Business insurance fees
- Legal fees
- Headcount cost
- Licensing fees
- Marketing and advertising costs
- Categorize costs into revenue buckets
Yes, categorizing costs can be a handful but we have a method to make it simple! It’s simple, divide your overall costs into two: Operational and Capital Expenditure, addressing large investments like equipment, land areas, etc. to the former one. This way, you’ll have a clear idea of allocating the costs that give you returns multiple times.
Further, while you’re calculating current versus future investments, try allocating dedicated percentages of your gross revenue.
For example, businesses into the restaurant industry sum up their labour costs at around 30 percent. On the other hand, retail businesses margin their labour expenses at 10-20 percent. So, once you’ve allocated the revenues into buckets, keeping a track of your money becomes easier.
- Create a cash flow statement
Cash flow is one such tool, you cannot simply underestimate! No matter the funds you have collected or allocated for operations in your startup, monitoring the input and outflow of cash is important. We suggest you initiate your cash flow statement by combining the total of costs and collections generated from the overall sales.
Remember, sales and collections are two different sources of cash inflow, unless your business is a cash or credit business.
Your monthly cash flow statement should be containing items like:
Monthly sales xxxx
Total fixed costs (xxx)
Total variable costs (xx)
Total cash balance xxxx
By breaking down your sales figures into the three elements mentioned above, you can easily find out the exact cash balance left with your business at the end of every month. Further, the remaining cash balance will also come in handy when you’re assessing information about the cash at hand and the sum you need to borrow from your working capital (if any).
- Pull it all together and set up upfront goals
Probably the last step is to pull it off together! Once you’ve pulled up all your sources of expenses and revenues, it’s time to get a complete view of the financial standing of the month.
However, your work doesn’t just end here! Once you’re done with setting up your budget, try setting up an upfront goal. Having established goals for your organization allows you to differentiate between the ‘would’ and ‘must-haves.’
- But, what about the analysis?
Analysis of operations is still a distant practice for businesses at large. Numerous business owners underrate the significance of collaborating data and result analysis while budgeting. Readily available tools like MS Excel, Google Sheets, and accounting software, are a great deal for seamless financial planning.
Remember, the better you are with your analysis, the seamless it becomes to leverage the future of your operations.
Ready to get started?
While you’re at it, remember, creating a startup budget is your first step in the right direction. A smartly designed budget acts as the first line of defense, especially when you’re running an early-stage startup. It works like a flexible plan of action, allowing you to adapt to changes and leverage future opportunities to successfully scale your business.
Now that you know the factors of successful budgeting, you should act on it now, if not yet!