STEP 5

Set Up a Budget & Forecasts

Setting up budgets

You have a plan and you know the products and services that you want to provide, now its time to start checking on the financial viability of your business idea. Working through the process of budgeting and forecasting gets you thinking about your business in advance.  

What is a budget?

A budget will give you an overview of the finances in your small business. It is all about making a prediction for how much money will both come in and go out of your business over a period of time. When starting out it is easier to create a budget on a monthly basis for a rolling 12 months.

You’ll want to know that all of the hard work that you are putting in is likely to pay off. Putting together a budget will help you see firstly whether you can afford to start the business and secondly, the likely time to payoff given the assumptions you have.

Why do you need to do a budget?

Budgets are predictive by their very nature. This means that you are making guesstimates about certain things. To make it useful you want to have as much ‘hard data’ in there that you can. This is usually much easier with expenses as you know what these will likely be. For a new business, it is much harder to estimate your likely sales growth.

However, going through this process gives you targets. It helps you think about how to tie your operations to your business goals and encourages you to make good business decisions.

When you are starting out, you need to know: 

  • How much will it cost to get everything setup
  • Knowing your products, how much do you need to sell to breakeven
  • It will influence your pricing strategy
  • You can see whether you will need to borrow money

How to Create a Budget

The first step is to work out what time frame that you want to use, typically it will be 12 months. We strongly suggest a monthly plan over a rolling 12 months.

The income side is actually a little harder to predict with a new business, as you don’t have any data about likely sales. Once you have an idea about those, then it’s straight forward to calculate the projected income:

Projected number of sales x The price you will charge

Determining the costs of your business should be pretty straight forward. Costs will be separated into three parts:

A
Start up costs of the Business or Project

These are the one off costs. This is money that you spend before you even open the doors to your business. And as a reality check– when you are starting your business you can’t expect to maintain a stellar salary as you will be asking people to invest into the business with you and they will want to know that their investment is going to be towards making the business work, not just pay you.

A
Variable Costs

These are costs that will go up and down depending upon how much stuff you produce. If you make more, your variable costs go up. If you make less, then these costs go down. You must know what these costs are in order to price effectively.

A
Fixed Costs

These are costs that will stay the same no matter how much stuff you produce.  Examples of these types of costs include rent, administrative salaries, telephone, insurance.

To calculate this properly you will need to know the number of projected sales (in units).

Projected number of sales x variable costs

PLUS      Fixed Costs

PLUS      Startup Costs

 

This amount will be the total outlay for this first 12 month period (or whatever the reporting period is that you choose).

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Look at the different ways that you can test your idea before you jump in, especially in areas like retail or food & beverage. Try a pop up store or co-share a commercial kitchen to trial your concept first.

– Sheree Cusack sixty:forty

Pull it All Together

Total Sales

Less your Costs

Net Position

When you first see an income and expense graph and there is more red than green it can be a little gut wrenching.  But it is a fact of starting a business. It is expected that you will start behind as you begin to gain traction, develop clients and sell your products and services.

What you do need to have though is a plan to make up the shortfall for that time. So give some thought to how you will fund the difference. These funds might be from personal funds or loans from friends and family.

Rinse and Repeat

The power in a budget comes in comparing it to actual results. This means that you should review your budget regularly. Our ideal is no more than 3 months, preferably each month to see if you are on track. There is a lot that can happen in a month, especially in a business that is starting out so it makes sense to review this often and see that your assumptions are holding.

This process also allows you to update your future budgets to allow for changes in the date.

Ask for Help

Budgets put you in control and will allow you make solid strategic decisions for your new business. Because you can use scenario planning it means that you can try out different scenarios and see how it impacts upon the numbers.

Setting a budget isn’t complicated but when you are just starting out it can be helpful to involve an expert. The reason is that they can run through the numbers, double check them and ensure that you haven’t missed anything major in your calculations. They can also give guidance on realistic assumptions that you can uses for sales numbers.

And unless you are really good with numbers you should find an accountant or bookkeeper to work with who can help you prepare a budget. You can find an accountant or bookkeeper in our Advisor Directory.

What can go wrong with a budget?

Some of the more common mistakes to avoid include:

      • Underestimating how much money it will take to get started and run your business
      • Being too optimistic about sales growth in forecasts
      • Building unrealistic financial projections
      • Not including cash contingencies
      • Creating a budget and then ignoring it
      • Making it too complicated
      • Not provisioning for taxes that need to be paid

Putting in this work to create your budget is worth the effort. Preparing your budget will give you financial insights that you need to make the right decisions as you start, build manage and grow into the future.

R

Next Steps

The next chapter will take a look at choosing the right structure for your new venture: Chapter 6: Choose a Business Structure

CTA: Want to join a Pre-Cede workshop about this topic? Sign up here!

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