Most business owners believe that creating a budget is limited to identify where to get money for next month’s expenses or payroll. In reality, this powerful financial tool can eventually help you in achieving your company’s short-term and long-term goals.
In the startup phase, it’s important to figure out how you can establish the right budget for your business. What will your operating expenses be? How much will it cost to release a new product or service? What equipment and tech will you need to get started? To give you a better grip on the process of budgeting, here are some helpful tips from us.
1. Set your target budget
Take note that there are two main types of startup budgets. The first one is the one-year budget, which is typically used to forecast daily, weekly, and monthly expenses. If you’re starting, you’ll need to prepare a rolling budget that you can update annually. The next type is the long-duration budget, which is meant for goals that can take about three to five years. You don’t need to be too specific if you’re business is still in the initial phase. Regardless of the type of budget you’re aiming for, it’s best to set a realistic layout and timeline for it. You can work with an accountant to help you with financial planning.
2. List your startup costs
The assets you purchase and expenses you incur before your business launching are your startup costs. In other words, there are the expenses that you need to buy first to open your new business and begin selling. The two types of these costs are startup assets and startup expenses.
Startup assets, also called capital expenditures, are not tax-deductible and refer to one-time purchases of liquid or non-liquid assets. These might include security deposits, vehicles, computers, furniture, and inventory. These expenses. Startup expenses will be your company’s fixed and variable expenses that you need to pay for before opening such as payroll and rent.
One good trick is to break down every expense. For instance, if you’re not planning to pay a lump sum to create and launch your business website, list down the parts or elements you need to pay for. These could photos, articles, web domain, CTAs, and so on. You should pay attention to other startup costs, including patents, trademarks, organizing fees, and office space.
3. Estimate fixed and variable costs
Speaking of monthly fixed and variable expenses. Fixed expenses do not change every month or are not affected by the volume of customers you got. Most common examples include bills of business phones, equipment lease payments, rent, utilities, office supplies, business insurance, credit card monthly fees, employee benefits and pay, professional fees, or business loan.
On the other hand, variable expenses are costs expected to change depending on your production and sales every month. These include commission costs, packaging and shipping costs, raw materials, production costs, and so on.
Apart from using the industry averages for this, new businesses can request quotes from contract workers, manufacturers, and third-party logistics products. For instance, if you’re opting to acquire dissolution apparatus or testing services from a third party for your new pharmacy’s launching, you need to get a quote from them to check if their pricing structure is fixed or flexible. If it’s flexible, you’ll need to give your budget realistic padding.
4. Create a cash flow statement
Your cash flow is the key to keeping your new business running, and it is more vital than your profits. If you want to pay your new business’ monthly bills, you literally need money in the bank. In creating your cash flow statement, start by listing down the totals of your monthly cash flow. These might include monthly sales, total fixed costs, total variable expenses, collected, and total cash balance. The total for all that will be your cash balance for the month. Take note that this isn’t your profit.
Be sure to regularly monitor your cash flow, especially during your first weeks or months, to get the right numbers. If you have more money coming in than going out, you got yourself a positive cash flow.
Whether you want to start budgeting for your business manually or digitally, make sure you consider each of these tips. Also, don’t hesitate to seek a professional accountant’s help if you’re not confident in doing the budget on your own. Develop a startup budget now and avoid those financial mishaps down the road!