Creating a small business budget is one of the key steps in launching a startup. Your budget plays an integral part in your business plan and in requests for financing. It also serves as a financial road map to help guide your business decisions.
As you sit down to start budget planning, it’s important to keep an objective mindset and know that the numbers are realistic. Because once it’s completed, your budget will help your business be more efficient, ensure you’re spending money at the right time and in the right places, and predict what it will take to become profitable.
Creating a budget shouldn’t be too time consuming or feel like a chore. So to help take some of the stress and time out of budget planning, we outlined four easy steps to help guide you through creating a small business budget.
4 steps to create a budget for your startup business
- Step 1: Determine what you need to launch your business
Before you can flip over the open sign on the front door of your business, what do you absolutely need to have in place? Your answer will vary depending on your business model, the product or service you sell, and if you have a storefront or a home office.
Most startup businesses will need a website, a computer, a few office supplies and an initial product inventory. No surprise, all of these items cost money. Which is why it’s important to think through what your startup necessities are and how much they cost.
Knowing how much money you need in the bank on day one will be the foundation you build your budget on.
- Step 2: Estimate your expenses
Every business has two types of expenses – fixed and variable. Fixed expenses are items that occur regularly and have to be paid no matter what. A few examples of a fixed expense include your lease or mortgage, business loan payments, website costs, utilities, and employee payroll and benefits.
After you have identified what your fixed expenses are, add-in your variable expenses. These are your business expenses that vary from month to month depending on the amount of business sales or transactions. Variable expenses are items like production costs, inventory costs, and packaging and shipping expenses.
- Step 3: Estimate your monthly income
The next step is estimating your income or sales. This can be hard to do when you’re a startup business. We recommend creating three scenarios. Your best-case scenario should be your most optimistic – shooting for the stars – sales estimate for your first year of business.
The worst-case scenario is going to be the opposite. This estimate should reflect very little sales during first year of business.
And the third scenario is the middle-of-the-road, or most likely, scenario for your first year of sales. This is the estimate you will want to use when talking to a lender about business financing.
- Step 4: Create a cash flow statement
This final step is an important one. Creating a cash flow statement using your three income scenarios from step three will help you predict if your business will need working capital to support your monthly cash flow needs.
Here is an example of a monthly cash flow statement:
Monthly sales: $40,000
Collected: $35,000
Total fixed costs: $20,500
Total variable costs: $10,000
Total cash balance: $4,500
In this scenario the startup business is predicting to end a typical month with $4,500 in cash on hand. If this isn’t enough to cover daily business operations a working capital loan can help support operations while you build your customer base.
Final tips
Creating a monthly budget is a critical step in getting your startup business off the ground. In addition to the information we’ve provided, there are a lot of great resources available to help you get started.
The Small Business Administration (SBA) has a number of free resources to help startup business owners. If you’re interested in free business counseling, the SBA can help you connect with partner organizations, like SCORE mentors, Small Business Development Centers and Women’s Business Centers.
Our commercial bankers are ready to answer your small business questions, contact us today.
