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How to Create a Startup Budget
If you are trying to secure financing for your new business then you will need to create a comprehensive startup budget. To be effective, a startup business budget should address two issues: what are the necessary costs of getting your business up and running, and what additional financing will you need to get you through the first year of operation.
While every business and situation is different, startup business budgets generally contain the following expense categories: product research and development (R&D), facilities, equipment, startup inventory, and advertising and marketing, in addition to projected fixed and variable expenses. A startup business budget should also include your anticipated income for that first year of operation.
Here are a few tips and information on what you should consider when forming your budget:
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Calculating the Pre-Operational Expenses for Your Startup Budget
When you begin creating your startup budget, you will need to determine the costs associated with turning your business idea into an operational entity. Here is a breakdown of the major pre-operation expenses:
- Product Research and Development - This startup expense includes all the money required to develop a product prototype and eventually produce a marketable version. It also includes any market research. Keep in mind that product R&D can be a significant expense particularly for those who are developing their own products.
- Facility - You need to include not only the costs of securing a property to operate your venture, but also any costs associated with making it ready for business. Some examples of facilities expenses are: security deposits, furniture and fixtures, renovations, and signage.
- Equipment - This category includes the cost of all the equipment and machinery your business will need to operate during the first year. Depending on the nature of your business and the expense involved, you will need to decide whether some or all of the equipment will be purchased or leased and if items need to be new or if they can be purchased second-hand. Typical items in this category include: office equipment, production tools and equipment, machinery, and shipping equipment.
- Startup Inventory - Startup inventory expenses include the cost of initial stocking of materials, finished products, and/or supplies that you need to begin operations.
- Advertising and Marketing - Many entrepreneurs choose to run pre-launch advertising campaigns or grand-opening promotions to generate advanced interest in their businesses. You should make sure to include any costs associated with these initiatives, such as printed materials, promotional products, and paid advertisements.
- Other Startup Expenses - Make sure to include any additional costs associated with establishing a new business, such as licenses and permits, professional fees for the services of an attorney, accountant, or other professional consultant, insurance deposits, and fees to incorporate your business.
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Budgeting for First-Year Fixed and Variable Expenses
Aside from your pre-operational expenses, you will also need to include the monthly fixed costs and variable expenses that your business will incur during its first year of operation. Your fixed expenses are the ones that do not change in response to sales volume. Here are some of the most common fixed expenses:
- Equipment Lease Payments
- Office Supplies
- Business insurance
- Professional fees
- Employee Compensation
- Business Loan Payment
Variable expenses on the other hand are ones that vary according to production and sales volume. Some common variable expenses include:
- Sales Commissions
- The Cost of Raw Materials
- Wholesale Price of Goods to be Re-Sold
- Packaging and Shipping Costs
- Income Taxes
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Projecting Income for a Startup Business Budget
The final component of a startup business budget is your anticipated monthly sales. With a new business venture it may be difficult to determine this amount. This is where your market research comes in. You should arrive at this number based on your knowledge of your potential customer base and, where applicable, your competitors.
You should also keep in mind when projecting future sales, that not all of your income may be collected right away, and this will effect your available cash flow.