Congratulations, you’ve decided that it’s time to take the leap and launch your own business.
These days, plenty of people just like you are taking the same approach. After all, the growth of things like the internet, mobile working, and cloud computing has made it easier than ever to launch a cost-effective company with very little initial investment.
Of course, before you can take your idea for a successful venture and bring it to life, you’re going to need a few things. For instance, you might need a business plan to help guide you from one stage of your business to the next. You’ll need a loan to get started with affordable repayment terms to help you get your organisation off the ground. What’s more, most importantly, you’ll need a business budget.
A budget is how you take your dreams for an incredible company and turn them into a reality – one carefully calculated expenditure at a time. Using this powerful financial tool, you can track how much money you’re making, keep your business expenses low, and ensure you’re always earning enough revenue to keep your organisation growing.
So, how do you get started?
Why All Businesses Need a Budget
The first step for many entrepreneurs is figuring out why a budget is so crucial in the first place. After all, understanding your cash flow is hardly the most exciting part of running your own company.
Ultimately, when you take the time to work out your budget, you can more effectively anticipate your current and future needs, building a roadmap for your company that you can follow from one success to the next. You need that map to understand where you’re going with your business and ensure that you’re seeking out the right capital, investment, and loans along the way.
A budget helps you to figure out how much money you have, and how much you’re going to need to spend to make the most out of your new venture. It also gives you an overview of the cash you’ll need to find from angel investors, venture capitalist firms, and loans, so that you can reach your business goals. Most financiers and banks will want to see a budget plan when you ask to borrow money, as this shows that you have a plan for how you’re going to make money and repay what you owe.
A budget will help you to determine:
- The funds you need for labour, materials, and other crucial expenses
- The total start-up costs for launching your business, acquiring any licenses and purchasing your business name trademark or domain.
- The costs of operating your business, and how much you need to earn each month to keep the lights on for your company.
- A realistic estimate of the kind of profits you can expect to make this year, next year, and in the next five years.
- How much you need to earn from your business to give yourself a decent income while paying any employees you might have.
The Components of an Effective Business Budget: Expenses
When you start to create a budget for your personal life, there are two things you need to consider: the amount you spend on things each month, and the amount you earn. The process is the same for a business budget. However, in this case, you may start with figuring out your expenses. Often, the monthly cost of running your company is easier to calculate and predict at first. After all, it’s hard to know for certain how many customers you’re going to have, or how much they’re going to buy when you’re just getting started.
The average budget consists of your typical revenues, costs, and your profits. The more details your budget is, the easier it will be to determine where you can improve your spending and saving habits to support your long-term goals.
Starting with your expenses, ask yourself how much you’re going to need to pay to keep your business up and running. Often, your expenses can separate into three different segments, including:
- Fixed costs: These are the expenses that are going to stay the same no matter what else happens in your business. For instance, you’ll need to pay the same on rent for your office or retail space. You’ll also need to consistently pay for things like business insurance, leased furniture, and broadband fees.
- Variable costs: Variable costs can change from time to time, depending on what’s happening in your company. For instance, the prices of paying for employees can vary according to seasonal changes in demand for your business. You might also need to pay more on marketing and advertising if you’re running a promotional campaign one month.
- Unpredictable costs: These are the expenses that are sure to crop up from time to time, even if you haven’t planned for them – like the cost of replacing crucial technology or hiring a new member of staff.
Planning for Profits
Once you understand your regular expenses as a business, the next step is to start working out what your profits might be. This is a challenging process for many beginners, as there are a lot of things that can affect your profit margins. Your best bet is usually to examine your industry and use research into your competitors to figure out how much you could potentially make.
If you’re not sure whether you’re estimating your profits properly, check with a trade association or professional accountant – they can help you out by giving you insights into industry benchmarks.
Your profit is how you end up with a complete budget by subtracting the total cost of all your expenses from your sales to get your average available income. It’s the money that’s leftover after you’ve handled your expenses that you can use to pay yourself, invest money back into your business, and deal with things like long-term savings.
As your company continues to evolve and your cash flow changes, you may need to change your budget regularly. Hiring a professional to help with accounting can make sure that you’re using your resources properly each month.