How do you create a business startup budget? Our Finance Consultant prepared a step by step guide to get you started. The guide applies for all types of businesses, of course with a bit of customization to fit your business needs.
Step 1 – Plan for “Day One” of Your Business Startup
Begin by determining how your “day one” of your business will look like, in order to open the doors and begin accepting customers.
A “day one” start-up budget can be broken down into four categories:
- Facilities costs for your business location, including all the costs of setting up a leased location for your store, office, warehouse, or for buying a building. If you are working from home, you probably won’t have location costs but you may have costs to fix up a room in your home for an office or a small production area in your garage. Facilities costs also include lease security deposits and signage.
- Fixed assets (sometimes called capital expenditures), for furniture, equipment, and vehicles needed to set up your location and start your business. Fixed assets also include computers and machinery, furniture, and anything for your office, store, or warehouse that is needed to set up your business.
- Materials and supplies, like office supplies, advertising and promotion materials. You might need an initial supply of these to get started.
- Other costs, like the initial fees to an accountant to help you set up your accounting system, local licenses and permits, insurance deposits, and legal fees to register your business with government entities and prepare operating documents.
In your listing of these startup costs, include items you are contributing to the business, like a computer and office furniture. Note the cost of these items in your list so you can get credit for them as collateral for a business loan.
Step 2 – Estimate Monthly Fixed and Variable Expenses
Fixed expenses:
- Rent
- Utilities
- Phones (business phones and cell phones)
- Credit card processing, Website hosting fees
- Equipment Lease Payments
- Office Supplies
- Dues and Subscriptions to professional publications
- Advertising, publicity, and promotion commitments, like social media or continuing online ads
- Business insurance
- Professional fees (legal and accounting)
- Employee Pay/Benefits (This category is semi-fixed, because you may be able to lower your employee costs at times.)
- Miscellaneous Expenses
- Business Loan Payment
- Internet
- Bank and government fees
Then add variable expenses:
- Postage, mailing, packaging, and shipping costs
- Commissions on sales
- Production costs
- Raw materials
- The wholesale price of goods to be re-sold
- Packaging and shipping costs.
- Advertising
- Other Marketing Costs
- Travel & Events
- Printing Services
If you have a service business, you may not have many variable expenses.
Step 3 – Estimate Monthly Sales
This is probably the most difficult part of a budget because you don’t know what sales will be for a new company. You might want to do three different sales projections:
- Best case scenario, in which you show your most optimistic estimate for first-year sales
- Worst case scenario, in which you show your least optimistic scenario, with very little sales during the first six months to a year
- Likely scenario, somewhere in between. The likely scenario would be the one to show your lender.
To be realistic in your budgeting, you must assume that not all sales will be collected. Depending on the type of business you have and the way customers pay, you might have a greater or smaller collections percentage.
Calculate the variable costs of sales for each month based on sales for the month as they will vary with sales volume. The variable cost of sales may include:
- Raw Materials
- Contractor Wages
- Commissions
- Transportation
Add monthly variable costs to monthly fixed costs to get total monthly costs (expenses).
Step 4 – Create a cash flow statement
Cash flow is literally the amount of money going in and out of your business each month.
Cash flow is more important than profits. You can be making a profit on paper, but if you don’t have money in the bank, your business won’t be able to pay its bills.
Begin your cash flow statement by combining total costs with total collections of money from all sales for each month. Remember that sales and collections might be different. For the cash flow statement, you’ll need to use collections.
Read:
- Why A Budget Is A Must-have For Your Startup To Thrive
- How To Register Different Business Entities In Kenya
This article was written by Augustine Matata, a Finance Consultant at Zenuha www.zenuha.com You can reach him on info@zenuha.com