By: MassLight Team
Budgeting is an essential part of financial planning for startups, given their limited resources. It helps startups to identify expenses and revenues, allocate resources effectively, and ensure profitability. According to a report by CB Insights, 29% of startups that fail do so because they run out of cash. This highlights the importance of budgeting for startups, as a well-managed budget can help to prevent cash flow issues and keep the business afloat.
To avoid running out of cash, which is a common cause of failure, startups should regularly review and update their budgets based on actual financial results and changing business conditions. A well-designed budget takes into account both short-term and long-term goals, and considers all expenses, including fixed costs, variable costs, and capital expenditures. External factors such as economic conditions, competition, and regulatory changes should also be considered when developing a budget. Budgeting can be challenging, but seeking the advice of financial experts or mentors can be helpful. Startups should also develop contingency plans to deal with unexpected events. Overall, having a solid financial plan in place is crucial for startups to achieve their business goals and maximize their chances of success.
Startups must be extremely mindful of every dollar they spend. With aggressive growth-hacking practices aimed at making the biggest impact with limited resources, there's no room for vague financial planning or unexpected cash shortfalls. A survey by KPMG found that 40% of startups spend more than they earn in revenue, while only 29% of startups are profitable. This underscores the challenges that startups face when it comes to managing their budgets, and the importance of developing a solid financial plan. To simplify budgeting and forecasting, follow our tips that allows startups to estimate their business startup costs, monitor their cash flow, and remain lean from the outset. Regardless of the tools used, whether it be accounting software, financial modeling software, digital spreadsheets, or even pencil and paper, these steps can be followed.
- Concrete Costs
You can calculate your fixed costs, also referred to as overhead costs, by estimating your regular business expenses that typically remain constant each month.
When starting a new company, it's important to allocate a budget for each of the fixed costs that may arise monthly. These could include expenses such as rent or mortgage payments, payroll and employee benefits, business insurance, website hosting, internet and phone services, professional services, and bank fees. To ensure that there is sufficient funding to cover these costs, it's essential to be aware of them. Additionally, it's important to take into account other expenses that may arise, like equipment costs for employees. For example, hiring an in-house social media specialist would require more than just a salary and benefits; they would also need equipment like a desk, laptop, and marketing software. Reviewing a list of business expense categories can be helpful in gaining a better understanding of fixed costs and ensuring comprehensive budgeting.
- Flexible Costs
Variable expenses for businesses fluctuate depending on sales and production levels and do not have a fixed monthly cost. Generally, these costs increase as a company scales up and decrease as it contracts. Some examples of variable expenses include raw materials, advertising spend, utilities, equipment, shipping costs, business income taxes, transportation, travel and events, and freelance services. New business owners can request quotes from manufacturers, contract workers, and third-party logistics providers or use industry averages to gauge these costs. It's also essential to consider how seasonality affects each cost. When budgeting for fixed and variable expenses, it's advisable to round up for a realistic cushion. To account for categories that tend to fluctuate, such as marketing and advertising or legal services, some experts recommend doubling or tripling estimates.
- The Startup's Expenses
Before launching a new business, you will need to consider startup costs, which include the expenses you will incur and assets you will purchase. These costs are the essential purchases that you need to establish your business and begin selling. There are two types of startup costs to consider: startup assets and startup expenses. Startup assets include both liquid and non-liquid assets, such as inventory, computers, furniture, vehicles, property, and security deposits. It's important to note that startup assets, also known as capital expenditures, are not tax deductible. Startup expenses, on the other hand, are the fixed or variable expenses that you pay before opening your business, such as rent and payroll. These expenses are tax deductible. Other examples of startup costs include office space, organizing fees, trademarks, and patents. It's important to break down each expense where possible, such as web-related costs, into specific items like a web domain, content management system (CMS), online shopping cart, design, and photos. Check the typical price range for common startup costs to help with budgeting.
- How Much Is Coming in Every Month?
To forecast your earnings for each income source, it is necessary to create two sets of revenue projections: an optimistic projection and a conservative projection since there is no past sales data available. Using your customer personas, estimate how often they will purchase your product or service. Consider market conditions, total addressable market, and potential market share. You can also calculate a monthly sales estimate using your break-even analysis. It's essential to be realistic about any factors that could limit monthly revenue growth. Additionally, make a list of potential revenue and funding sources, such as product or service sales, loans, savings, investment income, and business or corporate credit card. Finally, assess whether your startup costs and operating expenses match your initial target budget.
- Get it on Paper
To create your startup budget, there are various options available to you. You can choose to manually create a budget in a notebook or use the budgeting features of popular business accounting software to speed up the process. Integrating other financial tools like your business bank account will automatically update your general budget. Another option is to use a spreadsheet program such as Google Sheets or Microsoft Excel, which offers free startup budget templates with intuitive layouts and various timelines to choose from. Before inputting all your data, it's best to test the formulas with sample numbers. Make sure to set an upfront budget goal and factor in a starter emergency fund of at least three months' expenses. While this may be challenging initially, budgeting for contingencies is crucial. As entrepreneurs typically start with expenses since they're easier to predict, it's time to begin.
- Sum it Up!
Once you have estimated your monthly expenses, plug them into your business budget template and determine your startup costs. It's always wise to include extra funds in your budget for potential overspending and emergencies. It's common for new businesses to experience some level of deficit spending in the beginning stages, but if your budget is not realistic, you may need to make adjustments before seeking additional funding.
Review your expenses and classify each item as necessary or discretionary (things that would be nice to have, but you can live without). Begin by identifying discretionary costs that you can eliminate, reduce, or delay until later. This way, you can focus on covering essential expenses without overspending.
A startup budget is an essential tool for any business, regardless of whether you are pre-revenue or already established. It provides a clear outline of your expected expenses and helps you determine how much capital you need to launch and operate your business. By using market research and your best estimates, you can create a realistic projection that ensures you don't run out of cash too early or spend funds ineffectively.
Once your business is up and running, your budget becomes an analytics tool that helps you track how you're allocating resources. This allows you to see whether your team is spending and earning according to plan and identify opportunities for cost savings and business investments. For example, if you find that paid advertising is your largest expense category, you can analyze whether each channel is funneling high-quality leads and adjust your spend accordingly. With a well-crafted budget, you can quickly find direct answers to important questions or get pointed in the right direction.