Creating a budget for startups is complicated if you don’t understand how to do it properly. There are several umpteen factors associated with budgeting. Plus, you must focus on other business activities, achieve maximum growth, and comply with government regulations. However complicated the process may be, startups must create a budget and stick to it.
A proper budget forecasts your business expected revenue, expenses and cash requirements to meet present and future needs. If there is no past financial data to prepare a budget, you can use the best estimate on income and expenses.
If you are not an accounting pro and don’t want to spend huge on hiring professionals, look for a freelance accountant for startups UK. However, go through this guide to understand the importance of budgeting and how to create budgets.
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Why is budgeting for startups important?
Startup business owners can come up with numerous excuses to explain why they don’t create budgets.
But, no matter how many excuses they give, there are various important reasons why you need proper budgeting. Let us see a few,
● Control finances
● Reduce uncertain future cash flow needs
● Proactively prepares for challenges and problems
● Improves the ability to control business
● Enhances the ability to handle market changes
● Helps in making better, faster, and sound decisions
● Communicate your goal and priorities
● Ensure you have enough cash for strategic projects and initiatives
A person can’t see into the future, but with a budget, you can stay prepared for whatever comes tomorrow. Startups have a plan, and sticking to it has a higher chance of success than one with no agenda.
How to create a budget for my startup?
Your budget must be a living document where you can reevaluate or adjust numbers anytime as your business grows.
Here are a 6 steps to create a budget to help your startup.
1. Calculate your fixed costs
To prepare a budget, you need to start tracking all your expenses, including fixed and variable costs.
Fixed costs are easy to calculate, as they are the consistent and recurring expenses your business must make monthly. These are the necessary expenses you make to run the business, for example, rent, utility bills, insurance premiums, etc.
Calculate these expenses in two steps
● Find the consistent and repetitive expenses per month from the list of business expenses.
● Add up the numbers to measure the total fixed cost
To find the fixed price per unit, divide the total fixed price by the number of units you produce.
2. Calculate your variable expenses
As the name suggests, these expenses vary. Variable costs in the business depend on the number of goods or services you must operate in a particular period.
For example, you are running a car manufacturing company. Your variable expenses include the cost of raw materials needed and laborers producing each unit. If you make more units, your needs, and variable expenses increase.
Variable costs are different for different industries, and you need to track these expenses. It is here you can reduce unnecessary business costs. For example, if you already have a considerable stock of goods, and there is no increase in demand, you may not need to produce similar products for the next month. It will save your overall expense.
3. Identity one-time costs
One-time costs are more relevant to startups but are less frequent. These include purchasing basic furniture, website domain name, software, etc. Though you don’t need to purchase them frequently, staying prepared with an emergency fund to fulfill immediate needs is good.
4. Estimate your income
Business owners must understand how much money is coming into the business and from where to know if they can cover all expenses.
You can consider the number of sales your business makes and multiply that by how much each sale makes.
For example, you are an artificial jewelry seller. You sell earrings for £10 a pair, bracelets for £20 each, and a necklace for £30 each. To calculate your total income, multiply each price by the number of items sold, and add them all. Like,
Necklaces= 40 × £30 = £1,200
Bracelets= 20 × £20 =£400
Earrings= 60 × £10 = £600
So your total income is £2,200.
When starting a business, you usually don’t have a predicted number of sales from previous months or quarters; therefore, be conservative in making sales predictions. That doesn’t mean you cannot generate more sales, but it’s good not to overestimate your income. It will make your expenses go above your capabilities.
5. Track your profit or loss
The net profit margin of a business indicates how well you are doing. It is the amount left in your pockets after deducting operating expenses, interest, and taxes.
Firstly understand the revenue your business generates is not the profit you make. Revenue is the money coming into business through sales before deducting any expenses. Your business can suffer a severe loss even when your revenue is impressive.
Therefore, put all your financial records into a profit or loss (P&L) statement. Add all the earnings and the expenses, and subtract expenses from earnings. If the result gives a positive number, it’s profit; otherwise loss.
Keeping track of your financial health helps in making sound budget decisions.
6. Review the budget
Preparing a budget for a business is not a one-time process; you need to review it regularly. If your business is constantly making a profit, you must consider ways to increase or expand your business. On the other hand, if you are making constant losses, think of ways to cut your expenses and change a business plan to generate more income.
A budget is not a static document; regularly reviewing it means you will stay on top of your finances, understand where your money is coming from, find ways to make savings, or generate profits.
Running a business with proper plans and effective accounting is the main mantra to success. Having a professional to plan for your budget in the initial year of business is good, as they understand your current situation and can forecast the future with their experience.