If you are reading this article, it is either you are planning to start a business or you have started already, even if you have started for a while, you are going to find this piece informative.
Many new companies underestimate how much it costs to become operational and how long it’ll take to get there. So how can you avoid the financial drain of starting a business? By having a game plan for every cent and creating boundaries BEFORE you spend.
You do this by creating a startup budget, which is an estimate of all the expenses and potential losses you will incur to open your business.
Sure, making a startup budget isn’t as fun as buying all the things on Amazon, but it’s the first step to keeping your business afloat in the long run.
Step 1: Start With A Number
You need to set your budget goal at the beginning of this exercise, this is to make you not spend more than you can afford
Consider the amount of money you have or can obtain. What’s realistic for you to spend?
Remember, if you’re taking out a loan, you will have to pay it back. Only borrow what you can feasibly pay back. If you’re using your personal savings, don’t max it out in your budget. Leaving a little bit of cushion is important because you always want to maintain an emergency fund.
Step 2: Put Your Expenses Into Categories
Start by writing out all you think you will spend on your Startup business, then start categorizing them, the first set of categories should be
- Non essential
Essential items are costs that you absolutely must incur to get your business up and running. For example, this could be the cost of a business license.
Non-Essential items are costs that will make running your business easier but are not crucial for its operation. This is subjective, but use your best judgment here. A Non-Essential item could be the cost of a designer creating a logo for you. While it would be nice to have, you could still open your business without one.
Later items are things that can be put on hold for six months. These might be costs associated with scaling your business, like photography equipment for bigger gigs. If it won’t slow down your business growth, it’s probably a Later cost.
Step 3: Estimate How Long You Can Go Without Making Money
The next step is to estimate how long you’ll go without making money while racking up overhead expenses. These are called your losses.
We estimate losses because new businesses need time to build a customer base. So you want your budget to account for that timeframe.
1. Calculate your estimated monthly overhead expenses.
In this step, list and total all of your recurring expenses, or expenses that you’ll have to pay more than once that aren’t tied to your product or service. These include things like:
Rent for your office.
Compensation for your time (don’t leave yourself out of the mix!).
2. Estimate how many months you’ll go without making money.
Be realistic. While you may have some revenue coming in, how long will it take you to break even?
In the early stages of your business, it will be hard to forecast your income. Start with the total number of sales you’ll need to break even and then back into that number with your conversion rate, or the likelihood that a person turns into a customer.
Conversion rate = # of sales / # of leads x 100
If you’re a service-based business, consider the average cost of your services, how many clients you’ll need to obtain, and how often you will work with these clients. Then consider the actions you need to take to get there.
Step 4: Add A Little Bit Of Numbers To Your Budget For Padding
We’re at the point where you already have two essential parts of your budget figured out: your startup costs and your losses. Before you add the two together, there’s one final—and often overlooked—step: padding your budget.
It’s rare that a person can totally stick to their budget. Many people have a tendency to overspend, or spend their max without covering some key expenses. Padding your budget builds a safety net so you aren’t scrambling to cover last-minute costs.
It’s important to note that padding your budget is NOT an invitation to spend more money. It’s an airbag. You only deploy this airbag if you really, really need it.
Step 5: Adjust Your Budget To Fit In With Your Goal Budget
The final step of making a startup budget is adjusting your estimated budget to match the goal budget number that you set in Step 1. This is what’s going to make starting a business actually doable.
First, look through your startup expenses and all the items marked Non-Essential.
Which of these items can you eliminate?
Can any of these items be marked for Later?
Is there a way you can reduce the cost of these items (for example, buying something used, buying fewer licenses, downgrading the plan, etc.)?
Move on to your overhead expenses.
Are all of these expenses absolutely necessary for your business for the first six months?
Where can you reduce costs?
Can some of these costs be put on hold for six months? Let’s say you’re launching a photography business. Because you and your team will travel quite a bit, it may be unnecessary to pay rent for a physical office space.
- If you still can’t get your budget to balance, reassess your Essential costs.
Which of these costs are truly essential?
Are there ways to reduce these essential costs? For example, you may think a new lens for your camera is absolutely essential, but could you rent a lens instead of buying one? Could you buy it used or refurbished? Get creative with how you can save money.
If you’re stuck, consider talking to other business owners in your industry to see how they’ve been able to shave off costs.
Cycle through this process until your goal budget number matches your estimate.
Budgeting is the single most important thing you can do before you open your business. Not only do you start your new chapter prepared for the costs, you also develop the skill of intentional and boundaried spending.
So keep your money in check, and give yourself a higher chance of building a profitable, sustainable business that will be around for decades to come.