- Categorizing your costs is an excellent way to identify cash-burning projects rather than cash-generating projects.
- Research other businesses in your industry to gauge sales in your first few years.
- Remember that you’re not the expert at the end of the day – so talk to a pro.
What happens when you put two creatives in a room and tell them to build a budget for a small business? It sounds like the beginning to an accountant’s bad joke, but it’s a puzzle I’ve been solving ever since my business partner and I decided to expand our blog into an e-commerce site.
We both have marketing backgrounds, which means we have excellent experience with spending money, but not so much with balancing budgets. We’ve each had to tighten up, buckle down, and do some serious research on how to strategically tackle the big cash flow problem that faces most businesses like ours.
So as a small business owner, how do you plan your expenses when you’re still pre-launch? And how do you predict the cost of running a business when so many factors involved are unpredictable? It’s all part of what I’m learning along the way.
Why You Need A Budget
If you’re planning on seeking funding at any point, it’s important to closely track your finances. As you may have learned from watching Shark Tank, entrepreneurs that don’t understand what’s going on with their company’s finances end up looking completely out of touch with the inner workings of their organization. No bank or investor will want to shell out cash for a business that’s historically clueless when it comes to money.
On the most basic level, creating a budget gives you an excellent blueprint for forecasting the financial success of your business. With a smart and accurate budget, you can set monthly goals, set aside cash for marketing opportunities, predict cash flow challenges, and minimize risk. A budget will also help you surface your monetary issues. You might realize, for example, that your business partner could afford to cut back on fancy networking lunches.
A good budget will help you stop living in the world of maybe and start living in the world of definitely when it comes to realizing your company’s financial potential.
Components Of A Budget
All budgets can be boiled down to calculating expenses, revenue, and anticipated profit. Here are the basics you’ll be working with:
Expenses & Costs: What costs will you need to incur to get your business off the ground? Determine fixed costs (web services, office rental fees, salaries) that you can rely on accruing every month, in addition to variable costs, when will you need to replenish inventory, and what you want to spend on marketing.
Sales & Revenue: Estimating your sales can be a seriously daunting task without a benchmark. When I made the plan for my business, I looked first at our site’s current traffic and bounce rate, and did some close reading on conversion rates in my industry. I looked at my maximum potential revenue based on how much inventory I’m carrying and how much I can replenish every few months if necessary.
While I’d love to believe otherwise, selling out every month is not my most likely future. With that in mind, I took a hard look at my numbers and made a conservative estimate about what percentage of my inventory I need to sell in the first few months of business to stay profitable. From there, I put together a ballpark figure that I regularly adjust as the actualized numbers come in post-launch. It’s a lot of guesswork, but it gave me a stronger sense of realistic expectations and goals.
Profit: This is what it’s all about! Put your projected profit in your budget so you can work daily to make your business profitable as quickly as possible. Visualize! Manifest! Then set sales goals to make it happen.
Structuring Your Budget
You can structure your budget on a monthly, quarterly, or yearly basis. For baby businesses like mine, monthly is the safest bet. Because cash flow is critical and spending needs to be carefully managed, a monthly budget allows my small team to identify critical fluctuations as they occur, so we don’t spend too much too fast.
While we’re only a two-person team without an actual departmental structure, we divided our company budget amongst “departments.” Then, we looked at all of our expected fixed expenses and potential variable expenses, and decided how they would be assigned to our departments. Marketing includes all outside partnerships and networking events. Creative gets hit with the cost of creating video and visual content. Operations takes on our office expenses and shipping costs. By creating mini department budgets within our larger company budget, it’s easier to quickly assess where the bulk of our money is going, and where we can cut back.
As your expenses start coming in, you should consistently update your spreadsheet with realized costs, and calculate the difference between your anticipated and actual cost. If you’re coming in hot with loads of over-budget expenses, you’ll be able to swiftly modify your cash allocation to plan more accurately for the future.
Tools & Tips For Planning In Year 1
Making a budget is easy when you have a previous year of business to reflect on. But when you’re starting from square one? Not so much. If you’re stuck on where to begin, try a few of these tips to get started:
•Chat with someone in your line of business: Seek out a colleague who runs a similar business. They don’t need to be a direct competitor to have experience relevant to your own. What unexpected expenses did they incur in their first year? What was their biggest financial hurdle when starting out? Were there areas where they could have spent less in retrospect?
•Take advantage of free tools: Nobody ever claimed that managing a small business was an easy task. Don’t be timid about utilizing tools to help you track your finances. Microsoft offers free budget templates for Microsoft Office that can simplify the process of making your own. Also check out Personal Capital’s Cash Flow Tool. It categorizes your purchases so that you can quickly see where your money is going. Sort your expenses by category, date, or merchant to get a detailed look. It does most of the work for you, so that you can update your budget without spending a lot of time sorting through transactions.
•Talk to a pro: No matter how much reading I do about finance, I’m never going to be as proficient as a professional. Consider booking a consultation with an accountant to make sure your business is on the right track. If you rely on a professional financial advisor or tax preparer for your personal finances, talk to them about your business too. They might have some insights that you haven’t considered.
While I was initially intimidated, I’ve discovered how empowering it is to meticulously track and manage my organization’s finances. So much of starting a business is laden with uncertainty, risk, and anxiety. Despite the fact that I’m constantly adjusting my financial plan, having a plan at all alleviates some of the uncertainty. I feel more in control of my success and more accountable to my failures.
As with most things in life, knowledge is so much better than ignorance. Learning is so much more fruitful than remaining overwhelmed. And help? It’s truly only a phone call or web search away.