How to Create a Start-up Budget

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Creating a start-up budget can be difficult. Geniac found that, on average, a UK startup underestimates its costs by around £2000. However, creating a budget is a necessary step in the formation of your business:

Firstly, it helps you, the owner, decide whether you have enough money to begin your venture.

Secondly, it is a crucial tool for investors to know how much to invest. Without it, they would likely give you less money than you need. 

Finally, it is a key section in your start-up plan. The process of creating a start-up budget lays the foundations for other sections of your plan, for example, whether your business will be successful.

As a benchmark, the average UK start-up spends £22,756 in its first year. 

Although every business is individual, and you should pay attention to your business’s own specific needs, having an understanding of the rough start-up costs can inspire a sense of  confidence in your own budget or help you rethink areas you may have missed.

Plan for the first day of expenses

Whether it’s taking your website live or opening your doors, these are the costs needed to begin accepting customers and launching your business.

It is important to note that you shouldn’t go overboard. Think practically about what you will need; can you get anything cheaper? For example, not using the latest machinery but renting second hand machinery off another person. 

As financial problems are one of the major causes for businesses going under, it is likely you will need to keep your costs to a minimum. Reading How to start your business on a limited budget may help you save any unnecessary expenses.

Facilities Costs

  • Business location expenses such as lease security deposits, purchasing offices or warehouses.
  • Setting up your environment. This is relevant even for people working from home. Thinking about where you are going to work and whether it needs altering is important. (i.e. costs for paint and painters, builders and their materials)
  • Will you be buying anything outside your facilities, i.e. signs or sculptures to indicate your business is there?
  • Other leasehold improvements, for example, plumbing, electrical wires, sockets etc. etc.

Fixed Assets

  • Furniture
  • Equipment: this can range from being heavy machinery to a coffee machine, for example.
  • Vehicles
  • Computers
  • Any other assets you need to run your business.
  • Products and Supplies/Services
  • Advertising costs
  • Product materials
  • Promotional materials
  • Office supplies

Legal Costs

  • Incorporation fees: incorporating a company and setting up a current account with MachFast is totally free, mitigating any incorporation fees.
  • Licenses and permits

Other Costs

  • Business specific costs for instance.

Handy tip: write down the prices of the items that you are contributing to the business, such as computers or office supplies. These can be used as collateral for a business loan.

Monthly Expenses

Similarly to calculating the costs for your first day, calculating monthly expenses is best done by segmenting the expenses into two parts: variable expenses and fixed expenses.

Gather information on both the fixed and variable expenses you have each month. These will be estimations and therefore you’ll want to account for as many factors as possible when coming to your conclusion:

  • Accurately profile your customers
  • Work out how many customers there are in your target market
  • Research how much customers spend
  • Determine where the market is going, look at large data sets over time.  Using recent and up to date data for this is critical. Google Trends is very helpful.
  • Know your competitors, how many customers do direct competitors get? How many customers do the big players in your industry get? Is there a demographic your competitors have missed?
  • Do a sales forecast

Add up the costs of variable expenses. Variable expenses are dependent on the number of customers you have. Here are some examples, although include your businesses specific variable expenses.

  • Postage, mailing, packaging, and shipping costs
  • Commissions on sales
  • Utilities like electricity and water
  • Production costs
  • Credit card and bank fees
  • Raw materials
  • Hourly Wages
  • The wholesale price of goods to be re-sold
  • Packaging and shipping costs.

Usually service businesses have few variable expenses.

Add up the costs of fixed expenses. Fixed expenses are costs independent of the number of customers you have. Here are some examples:

  • Rent
  • Utilities
  • Phones (business phones and cell phones)
  • Website service fees
  • Leased equipment
  • Office Supplies
  • Dues and Subscriptions to publications or softwares, for example
  • Advertising, publicity, and promotion commitments, like social media or continuing online ads
  • Business insurance
  • Professional fees (legal and accounting). Geniac estimates that UK businesses, on average over a year, spend £6,259 on legal costs and £3,937 on accountancy.
  • Depreciation
  • Employee Pay/Benefits (This category is semi-fixed, because you may be able to lower your employee costs at times.)
  • Business Loan Payment

Monthly Sales

These will be estimations of how many products/services you will be selling each month. Therefore, it is important to get reliable data and account for as many factors as possible when coming to your conclusion.

Here are some tips on calculating how many customers you will get over time:

  • Accurately profile your customers
  • Work out how many customers there are in your target market
  • Research how much customers spend
  • Determine where the market is going, look at large data sets over time.  Using recent and up to date data for this is critical. Google Trends is very helpful.
  • Know your competitors, how many customers do direct competitors get? How many customers do the big players in your industry get? Is there a demographic your competitors have missed?

Knowing roughly how many customers you will get will give you an indication of how many monthly sales you will obtain and therefore your revenue. Despite doing research, you will never truly know your sales outcome. Therefore you might want to do three different sales projections:

  1. Worst case scenario sales projection
  2. Best case scenario sales projection
  3. A likely scenario sales projection

Realistically, not all sales will be collected by the end of the month. In order to get a better estimate of monthly sales, factor in your collection percentage. Hypothetically, if your sales estimates are about £30 000 a month, once you’ve factored in a collection percentage rate of 83%, your total revenue will be £24 900.

After finding out how many sales you are likely to get per month, calculate your variable costs for each sale. For example, if you’re able to sell 20 000 units at a variable cost of £2.30 a unit then your total expenses would be $46 000. You may want to put these expenses under the “Monthly expenses” section.

You’ll want to add the monthly variable expenses to the monthly fixed expenses getting total monthly expenses.

Finally, you’ll want to calculate your break even point. This is where you have enough sales to cover your expenses. Attaining above your break even point will show that your business will be profitable.

Cash Flow Statement

Cash flow is the amount of money your business will be making each month. Cash flow is a major cause for concern for SMEs with 50 000 failing in the UK due to cash flow problems, according to Xero. Even though your business may be making a profit on paper, if there is no money in your bank accounts then it cannot afford to pay off loans, bills or other debt.

Seaside restaurants commonly have cash flow problems. They make enough money in the summer months to turn a profit. However, come winter, their income is very little. This makes it difficult for them to stay open. Using sources of funding such as merchant cash advances give them an even cash flow throughout the year. Look at Sources of Funding: 9 Types With Examples for ways your business might be able to control its cash flow.

Calculating cash flow is simple: (money in – money out) per month.

Did you find this helpful? For more advice for small businesses, visit our blog.

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