Whatever your reason for starting a business may be, one thing is certain, you'll need to have a well-thought-out plan before opening your doors for business. It goes without saying, you'll need financial resources — capital — to build this vision of yours into a reality. You know what they say about all great plans having solid foundations. And that costs money! So how much money will you need? The following 6 tips on how to plan your budget will help you figure that out.
1. Know Your Business Needs
Before you can determine how much money you need to start your business, you'll first need to know what it is that your business does and the products or services it will offer. Knowing how much money you're going to invest in the company and overhead costs such as payroll, taxes, the cost of getting a registered office address for a limited company in the UK or other locations, rent, utilities, and other expenses is vital for planning a budget. To do this, you must know how to calculate your fixed costs and your overhead costs.
Fixed costs are those expenses that don't change regardless of how much or how little business you have. Think rent, utilities, etc. To determine your fixed cost per month for one year, multiply the yearly amount by 12/52 (there are 52 weeks in a year) = monthly fixed cost before adding on any other overhead costs.
Now add your overhead costs to your monthly fixed cost: advertising, marketing, phone bills, insurance premiums, and any other expenses that vary from month to month. Subtract this amount from the gross income you expect to generate each month after expenses. The resulting figure is your net profit per month. Here's an example:
- Monthly Fixed Cost = $500/mo
- $500 x 12 months = $6000 yearly fixed costs
- $6000 + $300 for utilities ($300 x 12 months) = $9000 monthly overhead cost
- Projected Monthly Gross Income = $25,000 (from sales and services provided by business)
- $25,000 - ($9000 + $3000) = $10,000 monthly net profit
2. Determine The Number Of Months You Will Need to Break Even
To determine the number of months it will take you to break even on your investment, divide the total cost needed to start your business by your projected monthly net income after overhead costs are paid. This is how many months it would take you to pay off all opening expenses if no new business came in during this time. Let's use the example above for this calculation:
- Breakeven point (months):
- $25,000 / $10,000 = 2.5 months to break even
3. Determine The Additional Cash You Will Need to Keep Your Business Afloat
Let's face it, there are times when our business doesn't generate enough revenue to cover expenses during that period. Perhaps you've hired staff only to realise it would be difficult for them to find clients right away, or you thought your marketing campaign would attract more customers than it did. So now you're stuck with overhead costs but no income coming in. This is where your contingency fund comes into play - another very important part of your start-up plan. To determine the amount of money needed as a contingency fund, take what you currently have plus any additional cash needed until your business can stand on its own two feet without needing a subsidy from your personal account. Here's an example:
- Additional Cash Needed = $3000 for 3 mo (3 months' projections)
- $25,000 + $3000 = $28,000 total cash needed to start up business
4. Use An App
If you're a bit of a techno-geek, then why not try an app to help calculate your budget? There are many to choose from. When choosing an app to help with your budget, consider the following factors:
- The number of features and functions that will best suit your business needs and operations.
- How user-friendly and intuitive it is (i.e., how easily you can learn to use it).
- Whether or not you will be able to access it from different devices (desktop, smartphone, other tablets) when you're on the go (so make sure your device can support the software if this is important to you).
5. Get Professional Help
Perhaps the best way to determine your budget for starting a business is by getting some professional help. There are plenty of business advisors who can come up with an accurate projection based on their own experience and advice tailored specifically to your business needs. How much this service will cost depends on the complexity of your business (and how much guidance you need) but it's worth considering, especially if you're venturing into uncharted territory or if you don't know where to begin.
When choosing a professional to help with your budget, consider the following factors:
- The number of years they have been in business and their success rate.
- How experienced they are with small businesses (you'd be surprised how many big-company executives don't know what's involved in running a startup).
- Whether or not you feel comfortable interacting with them on your own terms (as opposed to following their requests or conditions).
6. Be Realistic About Your Startup Budget Plan
Many hopeful entrepreneurs make the mistake of planning big-dreaming big, hoping for big profits and cash flow, only to become disappointed when things don't turn out as planned. You can avoid this by keeping your budget realistic and making sure the numbers add up. To illustrate the importance of planning your budget realistically, consider this example:
Let's say your budget calls for $8,000/mo in sales and you want to bring in $8,000/mo before taxes. You anticipate needing $2,500/mo for rent and utilities because you plan on having 5 full-time employees. Here's what will happen if things don't go as expected:
- Month 1 - Sales = $8,500 (sales are higher than anticipated)
- Cash Flow = $0 because all cash is tied up into expenses
When deciding on a budget, consider what needs to happen in order to reach that goal - and then plan accordingly. The key is not to be afraid of making mistakes along the way as long as you learn from them and adjust accordingly. The first step is always the hardest but once you're there, it's only a matter of doing it over and over again until you get it right.
