Some of the most groundbreaking products and services of the 21st century began as startups. Then, why is it that 90 percent of startups fail? While those launching a startup business may have a compelling concept or business idea, it’s difficult to develop stable, predictable cash flows without some financial structure and organization.
Establishing a budget at the very beginning of a new venture will ensure that you’re able to forecast profits over time and monitor spending habits as your business grows. It’ll also enable you to project benchmarks for raising capital. Below, we’ll identify three easy steps for entrepreneurs to take in order to begin budgeting for their new business.
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Determine essential costs
As a new business owner, it’s important to identity and monitor your company’s costs and expenses. This way, you’ll always be aware of the cash flowing out of your company at any given time, and tracking expenses will help you better manage your spending capabilities as your business grows.
Determining costs is particularly important as you start your business because there are a number of one-time expenses involved in establishing your company. For example, purchasing major production equipment or investing in logo design. Many recurring expenses, such as rent for an office space or utility fees, may also need to be considered.
Tracking both one-off and recurring expenses from the start of your business will establish a foundation for your budget, making it easier to continually track costs as your business expands.
When beginning to monitor and record costs, you can split them into fixed and variable costs:
- Fixed costs are costs to your business that do not change in value with changes in goods or services purchased. Once these are established, they do not change. Monthly rent expenses are an example of a fixed cost.
- Variable costs are costs to your business that change in value when your production level increases or decreases. If your business is producing a higher volume of products one month, you’ll be required to purchase more production materials than normal. The materials, in this case, will cost more than usual and serve as a variable cost within your budget.
Separating fixed and variable costs within your budget will help you better forecast your production targets. Once you understand the fixed costs that you’ll be responsible for on a regular basis, you’ll have a better idea of how much your business is able to invest in variable costs.
When starting out, determining costs is essential in order to sustain your financing and to be able to scale your business over time.
Related: 4 Things You Need to Know About Establishing Business Credit
Forecast future earnings
Once your business has been active for a few months, you can begin to forecast revenue similarly to your handling of expenses. Like expense monitoring, it’s important to track revenue from all streams of income in order to project business growth. When launching your startup, record all sources of funding and revenue. This may include external investments, sales and loans.
Unlike fixed costs, it’s rare that funding and revenue offer the same predictability in the forecasting and budgeting process. Because there are more external variables affecting sales and investments, it may be helpful to create several revenue projections. Experts recommend exploring conservative and optimistic potential revenue outcomes in order to establish a more holistic set of expectations as the quarter or year progresses.
Companies that opt for a conservative budget expect to achieve their goals about 70 percent of the time, while those choosing an aggressive budget may only achieve projections 30 percent of the time, according to TechCrunch.
While an aggressive budget encourages companies to challenge themselves to perform at high levels, it may be unrealistic for your business to achieve from the start. Creating several projections will manage expectations without forcing you to sacrifice ambitious project planning.
Forecasting future earnings within your budget will greatly inform your ability to make important business decisions for your emerging startup.
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Evaluate and adjust targets
After establishing expenses and projected revenue, it’s important to your business’s progression to evaluate and adjust your projections over time.
In examining your cash flow in your company’s early days, it’s not uncommon to experience a budget deficit. During such times, it may be advantageous to reconsider some of your non-essential costs and expenses.
If you find yourself spending more than you’d hoped month after month, you should consider separating your necessary costs from your discretionary costs:
- Necessary costs are different for every company and are essential to keep your business running. For example, if you’re running a bakery, you’d be unable to produce goods without flour and sugar. Your spending on resources like these would be considered a necessary cost.
- Discretionary costs may help your business run more smoothly and easily but are not required to offer your goods or services. These costs can be eliminated in the short-term without a significant impact on your company’s ability to operate. For example, if that same bakery was investing in digital advertisements on Facebook to bring in more customers, you could feasibly take down the ads for a few months to save money as needed. This would be considered a discretionary cost because you could continue running your bakery without the aid of the advertisements.
Determining which costs are discretionary will help inform your continued investments. If your paid advertisements are costing your business more than they’re worth, you can adjust your budget to no longer include the ads in the future. Regularly evaluating your costs is a good exercise, promoting the continued health of your company.
Setting a budget will help you make business decisions
Drafting a budget in the early days of your new startup may be one of the most important things you can do to ensure that you’re able to forecast growth and make important decisions. You can begin putting together a budget by defining costs and projecting revenue. After establishing a cash flow, you can begin to evaluate and adjust your budget to meet your business needs.
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October 31, 2020 at 05:01AM by Sydney Wess, Khareem Sudlow
