One of the biggest weaknesses facing small business startups in an unsteady economy is misguided budgeting. Managing cash flow during the first months and even into the first few years of a company’s life means dealing with quickly shifting payrolls and cycling through suppliers to find the right fit among a potentially endless list of other financial hiccups.
Without a smart budget flexible enough to absorb the bumps, it’s easy to drown your good idea in over enthusiasm and carelessness.
According to research conducted by the University of Tennessee, 46% of failed startups succumbed to “incompetence” in categories such as: “No knowledge of pricing,” Lacking of planning,” No knowledge of financing,” and “no experience in record-keeping.”
When used effectively, a business budget is a powerful financial tool available to the levelheaded small business owner. Having the fiscal foresight to manage both short and long term obstacles is one of the keys to keeping control over where your business is headed rather than having to steer it where your cash flow demands it goes.
Where to aim your budget
In order to craft the most effective startup budget, it’s essential that you include both the balance sheet as well as the income statement. This takes more into account in terms of cash flow than what you would otherwise encompass with just income and expenses.
Small business owners new to business budgeting in general are oftentimes afflicted with a budget scope far too narrow to effectively reign in every dimension of their finances. For instance, accounting only for income statements can seem sensible at first, but can leave out big expenditures that begin to develop from other corners of your business as your company evolves.
Future investments in growth such as real estate or new services and products can dodge your budget forecast and end up wrecking your cash flow when you thought you could afford to invest.
Asking yourself the right questions
Before you begin to roll out an initial budget plan, it’s helpful to make some assumptions about where you expect the business to go during its infancy and adolescence. It’s helpful to start categorizing and ordering your projected expenditures in order of what will sap the most from your cash flow.
Every business will have different sets of costs depending on their industry, but generally, these six categories are a good place to start if you’re in the early stages of planning:
This includes any kind of licensing or permits you’ll need to acquire, shipping costs if you plan on distributing a product, rental costs for office space, any insurance plans you think are necessary as well as office supply costs you’ll accrue on a regular basis.
• Technology considerations
If you plan to run your business through a series of web tools, prepare for a barrage of monthly subscription fees. This, in addition to hardware costs, data security systems, and IT can take a big bite out of a budget.
• Professional fees
If you plan on registering your company as an LLC, setting up your legal structure will not be free. Copyrights, non-disclosure agreements, and attorney fees are all something to keep in mind if you foresee yourself running into legal hurdles down the road.
• Marketing and/or sales
If you plan on marketing your business internally, trade show and event sponsorships usually involve annual costs. Outsourcing to a marketing firm can also be a bold part of your expenditure list depending on the service plan you receive.
If you’re throwing together a team for the business, or expect to in the near future, salaries, payroll taxes, benefits and workers compensation can leave big holes in your budget plan if the return seems negligible.
• Cost of sales
Lastly, your product inventory, the materials needed to make the product, and any equipment needed for production is the final category you should consider when planning your finances.
Tracking your cash flow to stay in control
There are a variety of tools available allowing small business owners to stay informed of their fiscal profile. These programs are highly customizable to fit the specific cost categories of your particular company.
Spreadsheets have been the go-to tracking method small businesses have relied on for years. It remains a popular choice for startups on particularly tight budgets since it remains virtually free, but if you may be better off investing in a comprehensive accounting tool. You can learn about some of our favorites here.
Regardless of the tools you use to do so, remember to be realistic when calculating your startup costs. Initial calculations often end up needing reanalysis and reorientation, so don’t end up disillusioned if you find yourself in murky financial territory early on.
If you’re looking for financial advice regarding a new startup endeavor, our outsourced accounting and CFO services experts can help you carve a successful future for you and your business idea.
Photo credit: Jason Rogers