‘A budget allows you to determine what is worthy of your money.’ Anonymous
In the initial phases of a startup, every penny counts. To make matters even more challenging, you may have to attain maximum growth while operating on a modest cash flow. This leaves little room for financial planning.
A well-designed budget may help you carry out your plans successfully.
What is a startup budget?
A budget is a tool for determining and analysing a company’s capital requirements in order to cover expenditures and manage cash flow, particularly in the early months. It serves as a blueprint, without which the firm risks wasting precious resources or running out of cash in a short period of time.
At each step of the business’s life cycle, your budget performs a distinct function. Once the business begins to settle, it becomes an analytical instrument that you can use to examine spending and income in each area, as well as deviations from the intended ones.
Let’s understand this through a startup budget example:
Let’s say you have a marketing budget of Rs 1 lakh. You spend Rs 50,000 on internet ad campaigns and Rs 10,000 on newspaper marketing. If online marketing attracts around 70% of sales, whereas print media garners only 30% sales, it clearly implies that the company should not expand its newspaper advertising budget and rather focus on online campaigns.
The above analysis is only possible by means of having a budget.
The importance of having a startup budget
The following are some of the most compelling reasons for entrepreneurs to invest in budgeting:
- It helps determine when to hire new staff or to invest in assets
- Helps to establish investment and borrowing limits based on your revenue generation
- You can predict your break-even point and adjust the fixed and variable spending balance accordingly
- You may offer a realistic image of your firm with potential investors based on current facts.
How to create a business startup budget?
Now that we’ve established the significance of a startup budget, let’s walk through the processes of creating startup budget:
1. Use relevant tools to set a target budget.
Startups can use various tools for creating startup budget based on it’s company size. A startup can generate a budget using a basic tool such as an excel template, or rely on dedicated budgeting software or an integrated financial tool to establish a budget goal.
What’s crucial to remember is that when it comes to budgeting, don’t overlook the importance of acquiring data and analysing the results.
2. List your initial expenditures
Startup costs are the expenses towards the most important purchases/services—the things you’ll need to get your business up and running and start selling.
There are two types of startup costs to consider:
• Assets: These are often one-time acquisitions of permanent assets like real estate, machinery, furniture, logistics and inventories. These are capital expenses that are non-tax deductible.
• Expenses: These are the fixed or variable costs you incur before you begin your business. Rent and payroll are some of the starting costs before your product launch. Tax deductions are available for startup expenses.
Join CoffeeMug.ai and connect with finance experts who can guide you on creating startup budget that allows you to anticipate starting expenses, track cash flow, and stay lean from the start.
3. Calculate fixed and variable monthly expenses
Next, calculate your fixed costs, commonly known as overhead costs. These are recurring monthly business costs.
Rent, business phone bills, credit card processing, Service charges for websites, payments on equipment leases, supplies for the office, professional subscriptions, marketing, and promotion, etc. are some of the monthly fixed costs.
Variable costs: These are monthly charges that will fluctuate depending on the number of consumers you deal with. These might include the following:
Costs of production, supplies of raw materials, costs of packaging and shipping, etc.
4. Calculate Monthly Sales
After calculating fixed and variable costs, the next most challenging aspect of creating startup budget is to forecast your profits. Often startups struggle to anticipate their monthly sales.
• Method 1: To generate forecasted revenues, examine your target market, the number of units a single customer is likely to buy, frequency of purchase, and customer lifetime value.
• Method 2: Benchmarking data against rivals or measuring sales growth in the first years is another option. It’s ideal to create both optimistic and pessimistic revenue projection scenarios.
5. Re-evaluate and revise total costs
Now, in your budgeting tool or template, input the worth of each component to determine how much money you’ll need to start your business and how you’ll handle cash. Remember to set aside emergency or buffer cash in case something goes wrong.
Working on specific components and then examining the overall picture in the budgeting model may reveal some tweaks that are required to make your budget more realistic and relevant. It’s important to remember that it’s fine to make changes. Examine each expense to see whether it is a must or a nice-to-have, and determine which costs may be reduced or eliminated to optimize earnings and savings.
How Can Coffeemug Help You?
Coffeemug.ai provides an ideal platform for startups to connect with experts in various domains. These experienced mentors can assist you on how to create a business startup budget, the selection of appropriate budgeting tools, and improvement of your financial knowledge.
FAQs
Q. What are the areas where startups spend the most money?
A. Startups spend their money on things like expansion, marketing, and research and development. Any startup’s success hinges on these three factors.
Q. What should a small business’s marketing budget be?
A. Experts suggest small firms spend 7-8 percent of their total income on marketing.
Q. What is the purpose of a budget spreadsheet?
A. A budget spreadsheet enables a person to assess his financial situation and plan expenditures over a period of time, generally a month or a year.
Q. How do you keep track of marketing costs?
- Align your marketing budget with your company’s spending habits.
- Democratize team expenditures while maintaining management.
- Make a detailed attribution model and track important KPIs.
Q. Is there a budget template in Excel?
A. Yes, there is an Excel budget template that can assist you in keeping track of your monthly budget based on income and spending. Simply enter your expenditures and income, and the difference will be computed automatically, allowing you to prevent deficits or plan for predicted surpluses.
