How To: Create a Business Budget
by: Leo Welder | ChooseWhat.com
A business budget is a roadmap that will guide you through your initial startup period and continue to orient you towards the right goals for the life of your business.
Creating a budget can initially take a lot of time and work, but the time you spend planning your budget can have an astronomical effect on how your business operates. In order to build a successful business, you need to create a specific plan of how much money you’ll need to spend to get started, how much you’ll need to operate, and how long it will take before you can start to show a profit.
The three most important things to know when creating a budget are:
Total Startup Costs: Money you spend before you can even start serving customers and generating revenue (e.g. cost of marketing materials, equipment and machines, cost of obtaining licenses or permits)
Fixed Costs: Money you’ll spend no matter how much business you do (e.g. rent, phone bills, employee salaries)
Variable Costs: Money you spend that is directly related to how much revenue you're making (e.g. If you sell BBQ, the price to buy and prepare the meat is a variable cost)
Before you create a business budget, you should:
Note: You'll probably want to get a computer and spreadsheet software before you create your budget. You could create your budget by hand, but spreadsheet programs will simplify the process and allow you to easily transfer information into other software like QuickBooks.
Create your budget in a spreadsheet.
Most people use Microsoft Excel or some other spreadsheet program, such as Google Docs, to build a budget. There are many other software tools designed for building budgets, but it’s probably best to start out with a simple spreadsheet until you have the time to test other tools. You could simply download Business Budget Templates for Excel from Microsoft’s website, but we recommend creating your own custom spreadsheet that will better fit your needs. Have a look at this example budget we’ve created:
Identify your costs.
Startup costs are the costs of everything you will need to get your business started (usually a one-time or infrequent expense).
Examples: Cost of marketing materials, equipment and machines, cost of obtaining licenses or permits, cost of purchasing a food trailer, etc.
When thinking of startup costs, assume you have significant funds and focus on identifying all the things you should have, regardless of whether you think you can afford them. You can always trim the budget after you’ve got it on paper, but you don’t want to trim your budget while you’re projecting your budget.
Look up costs for everything that you’re not sure about.
To be safe, add 50 to 100% to your total because starting up will likely cost more than you expect.
Fixed costs refer to the things you’ll need to operate your business that usually have a fixed, recurring price.
Examples: Salaries, rent, phone bills, the cost of maintaining your website or online store, etc.
Once again, it’s best to project all the costs you should have. You can always trim the budget later.
Be especially conservative with employees’ salaries; don’t expect to be able to hire people for less than market rates.
To be safe, add 50 to 100% to your total.
Variable costs are specifically tied to how much business you’re doing.
Example: If you sell BBQ, the price to buy and prepare the meat is a variable cost.
Calculating variable costs can be tricky because some things act like a hybrid between variable and fixed costs. As an example, take the cost of food at a restaurant. Theoretically, these costs are driven by how much food is being sold, but you can’t simply purchase an individual ground beef patty whenever someone orders a hamburger. You’ll have to estimate the number of sales you can make on a daily, weekly or monthly basis in order to know how much you’re spending on variable costs. Your sales estimates may often be wrong, so again be conservative.
Variable costs will usually be shown as a percentage of revenue, but you’ll want to test those numbers to make sure they make sense. For example, if you’re going to be making Wagyu beef burgers (that you buy at $5 per patty from a bulk store), and you plan to have the variable costs run at 50% of the revenue from the burger, you’ll need to sell your burger for at least $10 so that you aren’t losing money. Figure out what you’ll ultimately have to charge to maintain your margins, and try to predict whether customers will be willing to pay that price.
You don’t need to double these costs, but you should make sure you build in some padding to be safe.
Estimate your revenue.
Figure out how much you think you can sell, how much you’ll make per sale, and when. You should also factor in growth: How fast will your business grow, and why do you think that? How will an increase in revenue affect your fixed costs?
Verify that your numbers are realistic and make projections.
Once you’ve set up your budget, you’ll need to go back and verify that your initial numbers are accurate. You might have to do some research or draw on new sales figures to help you modify your budget to meet realistic expectations.
Revisit your budget often.
Don’t think of your budget as something you create once and never look at again. This is the financial side of your business plan, and just like any other plan, it’s likely to change several times. Continue looking at your budget often to make sure you still know where your business is going.
- Have someone else look over your budget. It’s always a good idea to take your budget to another person, potentially an industry expert or someone who has more financial expertise than you. A second pair of eyes will help you catch mistakes and red flags.
- Don’t rely on credit! When creating your budget you should keep in mind that all the cash you’ve got initially is all you’re going to have until you turn a profit. Don’t factor in using credit cards to cover the costs of your business. Save using your business credit card for times when you’re in a pinch. Your budget should be conservative and padded enough so that you can avoid using a credit card too often.