How You Should Budget For A New Business?

How You Should Budget For A New Business?

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When deciding to launch your own business, one of the most critical tasks that you have to focus on is to define a realistic budget. Let me reiterate one critical word…REALISTIC. This word is critical because, from conception, every potential business owner will want to make sure they can estimate costs and a revenue forecast that would enable growth and mitigate risks and business failure. A reasonable budget will not only help your business survive during the first few years (which are the most difficult years); it will also be what helps the business thrive in the long run. So, how should you make a budget for your new business? Here are four essential principles to help guide you in creating a budget for your business:

Understand the Basics

If this is your first time stepping into business ownership, you must know you have quite a bit to learn and should start by getting familiar with budgets…particularly your budget. When you are defining your business needs, picture it as the roadmap for your business and consider all the stops along the way. Here is what I mean. Think of it as a road trip (business venture), and you only have a map to get you from point A to point B. What would you need? Well, first you would need a car (your business) to get to point B. Then consider what you would need along this journey. The most crucial being gas (your budget) since it will be the only way to make it there. Now that you have established that, you will need to decide what you will need that may cost and where you are going to stop along the way.  

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As you move along this journey, consider how to maximize the use of your money and what necessities you need. While it may be a struggle to determine a balanced budget, understanding where your expenses will equal your revenues will help aggregate and highlight important details needed for your budget and your business. I also want to note that, in time, the goal should not be to “break even” when it comes to the expense/revenue ratio but to generate reliable revenue to pay expenses and pay yourself (and others if your business requires employees). The purpose for this is to ensure that your business is growing and not merely in a position of stagnation.

Creating the Budget for YOUR New Business

When you are creating a budget for your business for the first time, it may be a good idea to check a template online or seek online resources of businesses that may be similar to yours. In your research, there will be many different budgets, lists, and tips that you can use, but always be mindful that your business is your business and finding anything that fits your business may not be as easy. In these instances, the best solution is to use the data you feel will benefit your business and work with those parts. If your preference is to use one template (which will save some time), you can narrow your options by researching specifically for a budget template specific to your industry or niche and proceed to fill in the data necessary to create your budget.

Consider Your Profit Margin

If you are new to business and budgeting principles, understanding what a profit margin is will assist in budgetary decisions necessary for business success.  The profit margin is the difference between your revenues and your total expenses. For example, if you estimate to make $10,000 in your first year of activity and you expect to spend $9,000 in expenses by the end of the year, you will have a $1,000 profit or a 10% profit margin. As I mentioned above, this is where you ensure your expense/revenue ratio is one that will indicate growth for your business.

Estimating Costs

When you are calculating your costs, you need to ensure you don’t forget about the fixed costs; as well as the variable costs and the semi-variable costs. The fixed costs include items such as your property taxes, the rent, and insurance. On the other hand, the variable costs include all the materials that you need to make your products; as well as the cost of producing the products or providing the service. Last but not least, you will need to include the semi-variable costs. These costs are those that while fixed, will vary depending on your activity. These can consist of the salaries since you may need to pay overtime, telephone charges, training costs, etc.).

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So, as you are defining a budget for your business, remember to keep in mind that it has three main components:

  • Revenues or Sales, which represents how much money you make. Your budget should be able to show a forecast or estimate of this amount.
  • Total Costs, which are the costs that you need to support to be open for business. These include the materials to make your products, the salaries, and even the rent of the office.
  • Profits, which represent the difference between what you earn and what you spend.

To help you get started, check out this free invoice template tool by Bookipi.

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