When you are about to launch into a new business, it is essential to create a budget. There are three simple rules to follow:
Rule #1. How much money do you need to pay your essential bills?
This has nothing to do with the business figures, but everything to do with whether you will be able to survive the start-up phase of your new business. Have a good hard look at all your household costs, from the rent or mortgage payments, to food, vehicle costs, insurances, clothing, holidays, entertainment – everything.
Then consider whether you can cut down or cut back on any of these costs and determine how much money you need each month to cover these costs.
Rule # 2. How much money do you need to get the business off the ground?
This is the hard part because when you start out in business, you have no idea of what your costs will be. Here are some basic headings that will help to get you started:
- Sales and marketing – including branding, graphic design, website, brochures, business cards, advertising, promotions
- Expenses you have to pay for legally – business insurance, licences, workers compensation insurance (if you pay wages to anyone including yourself), ASIC filing fees (if you set up your business using a company structure), accounting fees (to prepare BAS and income tax returns)
- Cost of product or service – initial order of product, freight and delivery costs, importation costs, costs of sub-contractors, wages & superannuation (if employing staff from the get go)
- Overhead costs – rent of premises, cleaning, electricity, bank charges, credit card commission, stationery, postage, computer/IT costs, software or systems costs, telephone, internet
- Finance costs – interest on moneys borrowed, lease or hire purchase payments
- Unknowns – I recommend adding up all of the above and then adding 20% to cover anything you may have missed, costs that you have underestimated and to give you some leeway in the event that you decide to spend more money than you originally planned.
Take a best guess on these items and then seek out an accountant or business advisor to run their eyes over it. Ask them to make sure that the numbers are realistic and that you haven’t missed anything.
Rule # 3. How much revenue will you earn and when?
Consider how much you’re planning to sell your product or services for and then think about how many you would like to sell month by month for the ensuing 12 months. Then I recommend taking those numbers and dividing them by 2 to reduce them to 50% and using that as your budget revenue figure.
Now the purpose of this is that we usually overestimate how quickly the revenue will flow and what we’re aiming to do in this process is identify worst case scenario to identify how much money you will need to get started.
As a separate exercise you can then look at what you hope to achieve in revenue and potentially identify a wow this would be incredible if you achieved this revenue targets and those will be the targets you will be aiming for, not the 50% numbers in the calculations above.
Pulling it all together
Now for each month, add together the monthly figures from Rule #1 and Rule #2 to identify your total costs. Then deduct the 50% revenue targets you set in Rule # 3. This will show you how much money you will need to support yourself and your business through each month.
Then add the figures month by month to create a cumulative total at the end of each month.
And finally, take a look at those numbers and compare that to the amount of savings you have, any funding you have from family or friends, and any other sources of revenue that you will have over that period. This will identify how long you will be able to fund your start-up business before you will run out of money.
Most businesses fail due to lack of funding. Don’t fall into that trap. Do the sums, work out what you need and then find a way to fund it or know how long you have to make the business work and then hustle hard to get beyond that startup phase.