Creating budgets is an integral part of starting a business. As important as this aspect of a business is, it doesn’t come easy for many startup owners because it can be stressful due to the overwhelming level of information and advice that can be found. However, not preparing budgets can set a business up for failure, and that is why we have put together these easily digestible tips to help you navigate the process of creating budgets for your startup.
Determine Fixed and Variable Expenses
Fixed costs are constant or regular expenditures of your company that do not depend on production, rendered services, or the accounting period. This category of expenses includes rent and property taxes. Businesses operating in a rented facility will pay rent, and property owners will pay property taxes regardless of the business production or sales.
On the other hand, variable costs vary with each production or service rendered. They tend to increase when a business records a high output of products or services and decreases correspondingly, including raw material costs and labor costs. Make sure to also take into account external factors, such as shortages of specific materials.
Identifying these costs will help you manage finances effectively. Even if you can’t control the fixed expenses, you may find ways to reduce variable costs, like negotiating with your suppliers, optimizing production processes, or leveraging technology to automate and limit some payments. For instance, you can manage expenses, provide spending analytics and set expense limits to help you budget and save money using corporate cards. The card technology can also help you set monthly expense limits and easily manage subscriptions and recurring online payments.
Calculating Costs and Revenue
Every startup tends to experience a higher outflow of cash than the income in the beginning days, and startup owners may ignore accounting at this stage because it seems pointless. However, you must account for every penny you spend from the first day of operation if you want your startup to grow fast. Calculating this cost will help you set a direction for your budgeting in the long run.
Another task that may seem difficult for startups but is helpful while budgeting is tracking monthly revenue. You should know how much your startup generates in revenue every month of its first year. Then document the details appropriately. Contact a finance consultant if you are a new startup with no data to calculate monthly sales. Finance consultants will help you make estimations from their experience, considering your location and other variables.
Forecast Your Startup’s Cash Flow
Now is the time to predict future cash flow in your startup. Use the list of expenses and generated revenue you have compiled with the following steps:
- Add all the costs for each month and record the total.
- Calculate the monthly sum of generated revenue.
- Subtract the expenses from the total sum to determine profit or loss.
You may record loss while starting due to expenses like fixed costs and money spent while setting up. Don’t panic, and use the information to your business’s advantage.
Examine the profit or loss margin to identify the months your startup didn’t perform well financially. Identify unnecessary expenses and make plans to cut them out. Similarly, study the months of surplus, and try to replicate the business activities that brought profits in the coming months. You may need financial planning tools to help you save time and be accurate.
With a detailed record of all incomes and expenses, you know the financial position of your startup. You should focus on clearing debts if your estimations result in a loss by cutting down non-essential costs. Finally, use this financial projection to decide when and how to spend. Revisit the created budget before purchasing to ascertain whether the business can cater to the costs.