You’ve developed your vision, a solid business plan and decided to start a business but now you may be looking to hire staff or purchase additional equipment. While these are all great signs of growth for your new business, creating a budget for your startup is a critical first step to launching a successful business. However, the challenge many new business owners face is how to project expenses for your organization without any performance history to base those projections off of. Below we’ll help you discover five simple ways you can jumpstart your business with a budget that can grow with you so you can get to work faster.
1. Profit and Loss Statement
This type of budget examines your net worth after whatever expenses you may have in initially setting up your business. Without a performance history, you can use your profit and loss statement to help determine how much you have to work with now as you prepare to move ahead.
2. Determine Your Fixed and Variable Costs
In the early stages, it could be simpler to identify your business’ fixed and variable costs without the added factors of sales and expenses. For example, are you planning on working out of your home? If so, first consider determining any additional, on-going costs associated with working from home such as faster Internet or a new computer. If you prefer or need to work in a more traditional office space, factoring in the fixed costs of your expenses such as rent and utilities will be key in developing a well-thought-out business budget.
Identifying your variable costs could provide you with more room to work within your budget. Advertising, buying coffee for prospective clients and similar expenses are variable in the sense that these items are not directly needed to open your doors every day. While nice and could have some long-term benefits, excluding these from your budget can be helpful to keep overhead expenses low when starting out.
3. Project Your Sales & Profit
As your company gets off the ground, including your projected profit into your initial budget can allow you to see where you can grow and cut back in certain areas of your expenses. Also, you can include these factors within your first quarter by projecting for your ideal profit scenario. If you want to cut out the guesswork in your budget, it’s simple to incorporate your incoming sales and profit into your startup budget. It could be important in this stage to also include a “break-even” point to calculate when you’re sales are meeting your expenses. Be sure to start contributing to a SEP IRA or other retirement plan for your business as soon as you can.
4. Determine Where You Can Make Cuts
Now that you have a better sense of your fixed and variable costs as well as your profits, it should be clearer where you can make cuts in your budget. Are you needing to make some changes as your business grows? Take this time to see if you need to fixed expense goals such as employees to freelance or contractor work or perhaps it’s time to ramp up your advertising. Reexamining your budget for the next quarter can make your business more agile for the months ahead.
5. Create a Cash Flow Statement
Clearly knowing how much revenue is coming in and out of your business is paramount in growing and keeping it afloat. You can determine your cash flow generally by taking your monthly revenue and subtracting your total fixed and current variable costs to determine a total overall balance.
Your cash flow statement can be considered living, meaning it is expected to change month to month or quarter to quarter. Scaling your business can be simple with an initial budget of your expenses and growing it with your business. Using your budget to determine your cash flow statement could enable your startup more room when looking to grow your team and upgrade your equipment or systems.
Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.
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