Prepare start-up budgets
During the planning phase, it is important that you have an overview of your business' profitability. Drawing up realistic budgets is a good way of obtaining a good overview. Important questions you should be able to answer are: What will the start-up phase cost and how do you intend to finance it? Do you have enough money to pay the bills you will receive? Will the business be able to survive in the long term? A good and realistic budget will give you answers to many questions.
How do I draw up budgets?
The budgets provide an overview of the planned financial development of your business. They will provide an overview of how much the start-up phase will cost and help you to assess your business' profitability. The budgets will also show whether you will have enough money in your account to pay your bills. Together with the the accounts, budgets are key governing documents for your business.
Budgeting for entrepreneurs and founders
The budgets, along with a plan which sets out how you intend to run your business, provide important background information for the decisions that you will need to make. There are three budgets which you should take your time preparing before starting your business.
- Start-up budget: Shows how much money you are likely to have to spend in order to set up your business (capital requirements)..
- Operating budget: Shows the profitability of the business operation.
- Liquidity budget: Shows the ability of the business to meet its financial obligations.
How much will the start-up phase cost?
Your expenses will often exceed your revenues during the start-up period and it will often take longer than you planned to make the first sale. You may have to allocate money in the start-up budget to cover your living expenses during the early days. A useful tip is to draw up a list of what you will need, when you will need to purchase it and how much it will cost.
The start-up budget (capital requirements) shows a list of what you will need in order to get started and what it will cost. It is important that you include all one-off expenses linked to setting up your business. Make sure you have enough money to finance what you need and the initial operating period.
Common items in start-up budgets
The items you should include in your start-up budget will vary depending on the nature of your business. A general rule of thumb is to consider what must be in place before you can start delivering what you intend to sell to your customers. What you will need can vary from industry to industry. You can find out a lot about typical start-up costs by talking to someone who has experience in the industry your business will be entering or a mentor.
Some examples of frequently used items in start-up budgets are:
- Premises: Purchase, refurbishment, rent through to start-up.
- Machinery and equipment: Purchase of essential machinery and equipment.
- Means of transport: Purchase of vehicle.
- Office equipment: Essential equipment, telephone, PC.
- Production equipment: Essential in order to produce anything.
- Tools: Essential in order to carry out assignments.
- Initial marketing: Logo, domain, website, etc.
- Training courses: Essential for start-ups.
Operating budget (result budget)
The operating budget gives an indication of the profit/loss you can expect. Start the budgeting process by preparing realistic calculations. This will make the budgeting process easier. When you start budgeting, you must have at least an idea of what you will sell and at what price, what the goods will cost to purchase, who your customers are and what expenses you will incur in order to sell the goods or services.
You should also try to set up a budget month by month, so that you have a good idea as to how your business will develop. When you compare your budget with your actual accounts, you will soon see whether you are heading in the right direction. If it becomes apparent that you are selling less than you expected, you will be able to realise this and take appropriate action much sooner than you would otherwise have done.
Without any historical figures, it can be difficult to draw up a budget for the early operating years. During the start-up phase, it is important that you carefully think through the expenses that you will incur during your first operating year. The budgeting process will become easier once you have been running your business for a while and have historical figures available. One tip is to set up as realistic a budget as possible and to break down the figures per month. This will give you a guide for the early period of your business. It can be a good idea to overestimate your expenses and underestimate your revenues. If you find the budgeting process difficult, an adviser or accountant will be able to help you.
Once you have drawn up an operating budget, you should use this as a starting point for the preparation of a liquidity budget. A liquidity budget will show you whether there is enough money in your account to pay your ongoing expenses on time. If your expenses exceed your revenues during certain periods, you will be able to plan how you can stay afloat during these periods. It might, for example, be appropriate to take out an overdraft loan so that you can pay your bills on time. For new businesses, this is often one of the most important budgets to use in the management process, as most businesses have limited funds available during their early years.