Funding a new venture is challenging, though effective planning and budgeting can ensure your business stays afloat financially. Strategic startup budgeting is crucial for your organization as it keeps the finances and business on track. When estimating your business startup costs, it is prudent for business owners to set a realistic startup budget. It helps them to build a financially viable plan.

For the aspirant business owners, it is pertinent to have an efficient budget plan for execution so that you can efficiently track cash on hand, monitor business expenses, determine the return on investment, avoid getting into financial problems, and so on.

To further guide you on a healthy startup budget, let us understand its basic principles followed by some easy-to-follow steps.

 Why Is Budgeting Important?

Budgeting is one of the crucial steps when planning to establish your new organization. Here, we have listed some key benefits of effective budgeting for you:

It keeps you on track to achieve your financial goals

It stops you from overspending on things you are not worth enough.

• It helps you avoid debt.
• It helps you maintain your business’ financial position.
• It empowers you to make a sound business decision.
• It improves your clarity and focus.
• It provides you with a cushion against unpredictable situations.
• It ensures you continue to fund your current projects and business activities.
• It allows you to allocate appropriate resources to relevant departments.
• It monitors your performance and promotes your short- and long-term goals for business growth.
• It assesses your progress towards your short- and long-term financial goals.
• It gives you a clear picture of where the money flows in and out of your business.

Steps To Follow For Creating A Healthy Startup Budget

For startup founders planning to create a healthy startup budget, we have outlined the step-by-step process for you to follow.

You can then efficiently utilize your resources to improve your business profits, reduce costs, and increase returns on investment.

1. Set Realistic Targets

Startup founders aiming to establish their business should set up a financial goal for a budget plan.

Before proceeding further, try to answer these questions when setting your target.

• What do you want to achieve?
• How long will it take?
• What are the steps to achieving it?

Having a SMART goal for your budget is crucial as it will help you while planning how much money to set aside and how much to spend.

Here, the SMART means your goals should be:

• Specific
• Measurable
• Achievable
• Realistic
• Time-based

For instance, in your first year of business, your goal might be to increase revenue by 30 percent by the end of the fiscal year or sell “x” amount of business units per month.

Simultaneously, keeping track of your current debt and credit availability will enable you to avoid frivolous spending and the purchase of unnecessary resources.

Being a startup, you can estimate and benchmark your income by looking at average earnings across your industry. There is not much harm in overestimating the costs since you will need enough cash to handle your future expenditures.

Planning the budget using this way will help you make informed decisions and tackle any unwanted financial surprises.

2. Determine Your Startup Costs

Starting a new business requires careful planning and meticulous accounting of the industry and consumer makeup.

Launching a new business demands precise attention to budgeting as it helps to make informed financial decisions.

All businesses are different, so they require different types of startup costs.

Often, the startup costs include:

• Technological Expenses
• Equipment and Supplies
• Advertising and Promotion
• Employee Expenses
• Legal cost
• Insurance, License, and Permit Fees

With a strategic plan on hand, you should carefully choose the best funding source to infuse capital into your business.

Some of the sources of funding are:

• Personal Savings
• Business Loans
• Friends & Family
• Angel Investors
• Venture Capital
• Government Grants
• Crowdfunding sites
• Business credit card

Knowing your average monthly or yearly revenue can give you endless possibilities for business profit growth.

3. Decide On Budgeting Tools

To effectively manage your financial plan, there are different tools that you can opt for drawing your budget.

Financial analysts commonly use these budgeting tools:

• Microsoft Excel Spreadsheets
• Business Budgeting software
• Google Sheets
• Planning Maestro
• Quickbooks
• Quantrix
• Spendesk
• Scoro

 4. Estimate Your Fixed Costs

Fixed costs are the ones you have to pay over a specified period, even if you don’t make any sales. This business expense does not increase or decrease in conjunction with any activities.

Fixed business costs include:

• Rent
• Salaries
• Utilities
• Property taxes
• Interest expense
• Depreciation
• Insurance
• Miscellaneous

Business professionals have to assign this cost to the indirect expense section of the income statement leading to operating profit. Financial analysts suggested that every company should understand the nature of fixed costs they incurred to ensure effective management of their expenses.

 5. Calculate Your Variable Costs

These are the business expenses that are not fixed and change over time. It depends on how much a company produces and sells a product.

Therefore, the variable costs increase as production rises and decreases as production falls.

• Variable business costs include:
• Commissions
• Packaging
• Utility expenses
• Labor
• Raw materials for production
• Transaction fees

It can be calculated by multiplying the quantity of output by the variable cost per unit of output.

Total Variable Cost = Total Quantity of Output x Variable Cost Per Unit of Output

Moreover, variable costs differ between industries. Therefore, one cannot compare the value of an appliance manufacturer with a car manufacturer.

That’s because their product output isn’t comparable.

Budget analysts should be vigilant when comparing the variable costs between two businesses, ensuring you choose organizations that operate in the same industry. Variable costs also play a crucial role in break-even analysis which determines the amount of revenue or the required units to sell to cover total costs.

We can calculate it using the given formula:

Break-even Point in Units = Fixed Costs / (Sales Price per Unit – Variable Cost per Unit)

6. Estimate Monthly Sales

Established businesses have leverage over the startups to create more accurate sales forecasts due to the availability of the previous sales data.

However, new businesses find it a bit difficult due to the absence of any past pattern.

In this scenario, the startup founders should do thorough market research and consider the competitive benchmarks and other interests to establish a baseline for sales numbers. For entrepreneurs, it is imperative to understand how profit, loss, and revenue work and how to calculate the revenue for a startup.

This knowledge will help you understand the profit and loss balances of the business. It will also assist you in determining the pricing of products and services to ensure that your startup generates revenue.

Professional accountants develop both optimistic and pessimistic scenarios of revenue forecasting. To calculate annual revenue for your startup, you can use this simple formula.

Total Annual Revenue = Total units sold x price of each product.

Also, to calculate the profit gained in a year, you can use the following formula:

Gross Profit = Annual Revenue – Overhead costs

Often the overhead costs include all your startup, post-startup, and other expenses involved in making your product or service available to your final consumer.

7. Create A Financial Report

For entrepreneurs, the key three financial reports crucial for their startups are;

• Balance Sheet
• Income Statement
• Cash Flow Statement

Among the above three, financial experts consider creating the cash flow statement for the new startup businesses because it will enable you to predict when you will break even at any given moment.

A cash flow statement is the financial statement of an organization that details the amount of cash and cash equivalents entering and leaving a company.

It determines your company’s overall financial health and helps you make an informed decision.

A typical cash flow statement comprises three sections:

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities

For example;

As a startup company owner, if you contributed any initial cash while launching your business, it will be referred a cash inflow. However, if you have purchased any office furniture or equipment when setting up your initial office, the expenses will be counted as outflows of cash.

With a clear understanding of your cash, you can better prepare for seasonal ups and downs and position yourself for unexpected situations.

 8. Compare, Adjust, and Track Your Spending

Now that you have a complete picture of your baseline spending and other expenditures, it is better to compare your expenses to your income.

Likewise, you have to adjust your spending if your expenses are higher than your income.

In either of the above situations, an efficient budgeting framework will enable you to track your spending and identify any weak spots.

 Final Thought

Being new in the market, every startup founder strives to avoid failure by adopting the right strategy. Therefore, a good plan will help you forecast which months your finances may be tight and which of them you will have more money. Having a healthy startup budget will enable you to manage any unexpected risk timely.

At Numberly, we aim to assist startup founders to manage their ventures with the right financial wisdom and insights. If you are looking for expert advice and a customized budgeting model for your business, get in touch with us and book a no-obligation consultation session.