A budget, like a business plan, is absolutely necessary for a start-up business venture. Without a budget, the owner will not know if he or she has included everything. There will be no picture of what the business will look like at the end of the year without revenues estimates. Often business start-ups are short on available funds. There is often a time constraint on how long the business has to break even and start making a profit. A budget that shows an eventual profit makes a case for a valid, sustainable business.
In addition to providing a picture of the business, the budget is at the same time, a road map. Extending income and expenditure out into the future will give the owner (and possibly investors or creditors) an idea of what route the business will follow and describe its long term possibilities. In doing an initial budget, there are three basic categories that have to be accounted for: initial start-up costs, expenses and revenues.
Initial start-up costs are one-time costs necessary for starting the business. For example, these include attorney fees for incorporation, logo design, stationery and brochures, research and development, insurance, consultants and rent are a few of them. Start-up expenses will vary with the type of business.
Expenses fall into two primary categories: fixed and variable. A fixed cost is one that does not change when the volume of business changes. Rent is a fixed cost. Lease payments for car or office furniture are also considered fixed. Salaries that are set on a monthly basis are also in this category. Variable costs, on the other hand, change as the volume of business changes. Shipping costs, hourly wages, and marketing costs are examples of this type of expense.
One useful method is to put your expenses into categories, rather than lump them all together. Generally, these categories are the cost of sales, professional fees, cost of technology, administration, sales and marketing and wages and benefits.
Spending some time with your accountant is invaluable when setting up an initial budget. An accountant will be able to go over your budget items and review what you have included. The accountant will also be able to make sure that your accounts have been numbered and named appropriately. This will make it easier to apply your expenses correctly.
Revenue should also be added to your budget to complete the picture. Revenue projections should be based upon research and be a reasonable reflection anticipated business activity.
Review your budget with your accountant. Having a professional look at budget and evaluating it in terms of reasonableness will help assure that all costs have been considered and revenue is realistic. This budget is vital in the development of your business plan.
Don’t toss your budget into a desk drawer, however. Review it regularly, comparing the forecasted numbers to the actual results. This should be done on both a monthly basis and a year to date basis. Budget reviews will help you find areas of expenses and revenues you might have misjudged or missed altogether. By staying on top of your budget and actual performance, you will have the opportunity to adjust costs and revenue projections to reflect exactly where the business has been, where it’s going and find opportunities for growth.