THE BASICS OF MANAGING YOUR BUSINESS BUDGET
There’s a saying: behind every successful business there’s a great accountant. But when you’re just starting out, you likely won’t have a large staff, so that accountant will likely end up being you. You may not be a wizard with numbers, but if your business is going to survive and thrive, you’re going to have to understand the rudimentary aspects of both putting together a startup budget and managing your business’s monthly finances. Let’s start at the beginning
CREATING YOUR STARTUP BUDGET
If you’re launching brand new business, one of your first steps should be creating a startup budget so you know how much money you’ll need to get your business off the ground. This involves putting together a detailed plan of your business’s finances, so break out your budgeting tool of choice — and maybe a coffee!
First off, you’ll need to make a list of all your potential expenses in the Projected Budget column. These can be split into two sections: Startup Expenses and Operating Expenses. Your Startup Expenses usually consist of one-time, non-reoccurring costs associated with getting your business off the ground, while Operating Expenses reflect ongoing monthly costs. These Operating Expenses can be further broken down into Fixed Expenses that remain the same month-to-month, and Variable Expenses that tend to fluctuate.
This should paint a picture of both the cost of getting your business up and running, as well as the ongoing monthly cost of doing business. It’s a good practice to have access to enough money to cover your Startup Expenses plus 6-12 months of Operating Expenses before you launch. That can give your business the time it needs to catch on and grow. Of course, not everyone has access to that much money on-hand, so taking on investors, business partners or a Business Loan or Line of Credit can also be good options to consider.
Next, you’ll enter your gross sales or operating income estimates in the Projected Budget column. You’ll want to do a little research here so you can base your projections on other businesses like yours in similar sized markets. And, when in doubt, it’s best to be conservative with your estimates.
When you compare your projected revenue to your projected expenses, it should give you an idea if your company will be a profitable venture. This budget, along with your business plan, can also be used to help secure seed funding from angel investors, partners or your financial institution.
MANAGING YOUR MONTHLY BUDGET
Ok, let’s say your business is now up and running. Up to this point, some of your cost and revenue numbers may have been best-guess estimates. Now it’s time for a reality check. Add a new column for Actual, where you’ll track all your real-world costs and income throughout the month. Then add a column for Difference, which will be the difference between your projected budget and actual costs/revenue. This will help you identify issues and rectify them before they get out of hand.
Finally, at every month’s end, make sure you review your budget. You can do this by adding up your Total Actual Revenue and subtracting your Total Actual Costs to show you your Monthly Net Income. Make sure you look over all your expenses and revenue streams. Is your business on-track? Does anything need fine tuning? It’s important to look at your budget with a critical eye, shift funds where they’re needed and halt any spending that is wasteful or doesn’t see a good return.
Another important element of your budget that you should review at month’s end is your Monthly Cash Flow. It’s calculated by subtracting the total money your business has left at the end of the month, from the money available at the beginning of the month. Ideally, you want to maintain a Cash Flow equal to 3-6 months of your Operating Expenses to deal with any unforeseen circumstances or downturns in the market – you can think of it as a business’s emergency fund.
It’s important to note that many startups aren’t profitable right away. There are many upfront costs involved in launching a business and it can take some time to ‘break-even’ and move into profitability. So, don’t feel discouraged if your business isn’t an overnight success. The important thing is to be steadily and consistently moving in the right direction.
One thing that can help is a Business Bank Account. Not only are they great for tracking your budget and managing day-to-day transactions, but it also keeps your business’s finances separate from your personal finances, which is extremely important. It’s also a good idea to speak with a Business Banking Expert, who can talk you through your options and help you find the right solutions for your unique circumstances.
Eventually, if all goes well, your business will grow and prosper, and you may be able to hire a certified accountant to handle the books for you. But until that day, understanding how to manage your business’s budget can add another tool to your toolbox and give you a strong grasp of business finances, which are critical to the ongoing success of your business. For more information about budgeting and launching your new business, check out our Small Business Guide. Best of luck, Northerners!