Do you know that a startup budget can guide you to avoid any missteps in the initial stage? Have you ever realized why investors or banks always insist on a startup budget?
It is because each penny counts, especially in the initial phase of a startup.
Whether self-financed or borrowed, proper allocation of every penny in the business operations counts. Budgeting and financial projections might seem troublesome, and these are the lifeline of your startup in the first few months.
Many small entrepreneurs adopt aggressive sales strategies unknowingly without any proper survey, understanding market demands, and targeting actual economic buyers. They aim to bring a significant impact on the sales with the money available.
After a while, they lose most of their investment and are left to deal with surprise cash shortfalls. Then, due to not creating any startup budget, they make up vague financial planning and fail.
If you need to create your own, we will guide you through a simple process to create a budget step-by-step for your new startup.
Why Startup Budgeting is Important
A startup budget is initial financial planning that enables you to spend money diligently to cover your day-to-day business costs.
A reliable startup budget plays a significant role in ensuring the economic viability of your new venture, whether you are seeking venture capital funds or planning to get finance from loved ones.
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Simple Process of a Startup Budget
It would be wise to start with well-researched data from different sources like market survey, competitor analysis, percentage of total economic customers out of targeted actual market demands and vendor quotes, components of revenue, and costs.
You do not have to make sophisticated financial forecasting in the initial stage. Just take the numbers from the market research, stay reasonable in assumption, be conservative in revenues, and overestimate expenses to form the basic layout.
Select Your Budgeting Tool and Determine the Budget Goal
Start with a pen and paper as your budgeting tool. If you want to digitize your number, go for user-friendly tools like Microsoft Excel or Google Sheets. These come with intuitively formatted templates to start with, saving you the hassle of constructing one from scratch. Next, check the line items and formula if they are correct and, if required, adjust each line item.
A line item is each revenue and expense record. Determine the budget goal ahead to stay on track while allocating money on the necessary and discretionary expenses. Try to keep additional cash on hand for three months to tackle any uncertainties.
List Your Essential Startup Costs
The assets you acquire and the expenses you incur make up the startup costs before launching your company. This budget represents the startup strategy you have adopted and how you will start selling and establishing the business.
Capital expenditure and operating expenses will significantly impact the overall startup budget as these expenses are dependent on your value propositions. Value proposition refers to the value or feature you want to offer to your economic customers. To produce the product or offer service, you have to set up facilities (capital expenditure) in an office and hire staff (operating cost) to work with you.
To give you another precise idea of the startup budget, let us pick up the website development cost for an online business. You will not pay a lump sum for just the website development but also the domain, content management system, online shopping tool, UI/UX design, secured payment system, and anything else you think necessary.
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Estimate Your Fixed Costs
Why would you estimate fixed costs ahead before starting your first month? First, fixed costs are independent of the production level and remain relatively the same over time. For example, renting an office space or taking a lease of land or equipment.
Unless you move to your location, you have to pay a certain amount for the rent and lease, irrespective of the production scaling. More examples include premium insurance, utility bills, legal services, web hosting and domain, administrative expenses, and payroll.
Estimate Your Variable Costs
Variable costs are relatively dependent on the volume of sales and productions. Therefore, if your business scales up, this cost will increase proportionally.
Examples of these costs include but not the least, cost of goods sold, sales commission, fees for paid advertising, hosting and domain fees, a service fee for marketing agencies, seasonal contractors, travel and transportation cost, any trade shows, income taxes.
Calculate Your Monthly Revenue
It would be wise to separate components of revenue and cost items. For example, let’s assume you are selling green technology to houses. This technology is a primary product –hardware.
Additionally, you offer two software options to the customers like monthly/yearly subscription and built-in software with a monthly/annual maintenance fee. So in this example, we get two software options and two recurring revenue options (maintenance and subscription), all of which are revenue components.
This way, think about the cost items. The hardware, license, packaging, documentation, and other associated costs are the cost items relative to the product. Then, when you have the seasonal sales volume per month, you can easily calculate the revenue and expenses of the products.
Total the Costs, Review & Adjust
We are almost there. It is advisable to have a master plan for each cost line item, like hiring or buying. This way, take the total startup cost, break it down monthly, and compare it against the monthly revenue estimates.
You will notice if the business generates enough profit to cover your expenses and reach the break-even point. It is normal to have a deficit in the bottom line, but you need additional money to sustain it. However, you can further review and adjust the total costs or make a plan for external funds to maintain your business.
Budgeting is the key if you want to get insights to succeed for the first few months. If you are not comfortable enough to do it alone, it is advisable to seek assistance from an expert. It is always better to save your effort and time before it is too late. A reasonable startup budget will prove invaluable before you step into the actual business.