In order to make money, you have to spend money. However, burn rate for early-stage startups can often be fairly high, meaning many founders may find themselves draining their company’s funds faster than expected. To stop yourself from breaking the bank before your startup has the chance to take off, you’ll need to create a budget.
A budget can serve as a roadmap for understanding where your business is headed. With a detailed budget, you’ll have a strong grasp on where exactly your capital is going, how much your business needs to spend in order to profit, and how much profit is necessary to achieve “success.” Budgets also help with managing a team, by giving everyone a clear view of where money needs to be going.
Creating a budget for your startup begins with four simple steps:
1. Plot your fixed and variable expenses
Your expenses can be split into two categories: fixed and variable. Fixed expenses refers to the payments you have to make every month. These include leases, utilities, subscription costs, and any other routine costs that are essential to keeping your business running day-to-day. Variable expenses don’t necessarily occur on a monthly basis. Rather, these kinds of expenses fluctuate based on the volume of sales, transactions, and other costs. Examples of variable costs include advertising, employee bonuses, contingency funds, etc.
As a startup, it’s important to keep your expenses low, especially while in the early stages when you may not have as many investments to back up your spending. In your first months, make sure you’re only spending when it’s completely necessary.
2. Estimate your monthly sales
When beginning a startup, it can be difficult to predict your profits, especially when you have very little data to back up these estimations. In order to best plan for your startup, it’s recommended that you make three sales projections: the best case scenario, the worst case scenario, and the likely scenario (an estimate that falls in-between the prior projections). Though uncertain, having these projections can help you stay one step ahead of potential failures.
3. Create a profit and loss statement
Once you’ve established your spending and your sales, you’ll need to gather all of this information into a profit and loss (P&L) statement. This statement (also known as an “income statement”) calculates the difference between your startup’s revenue and expenses to show your net income. Your P&L statement can give insight into the profitability of your business, which can help in the process of getting loans, and serves as a tool for tax preparation.
4. Make a balance sheet
Another essential financial document to create is a balance sheet. Your balance sheet illustrates the amount of resources, debts, and ownership your startup has at any given point in time. Using your balance sheet, you can track if your spending and earnings are on track for your projected budget, and can be an essential tool in creating a new budget the following year.
Once you have a good idea of how your money is moving, you’re ready to create a budget. Examine how much it costs to keep your startup running and compare that to your predicted income. Prioritize essential spending and eliminate any unnecessary expenses. Keep tabs on your cash flow monthly so that you can make adjustments when needed.
Due to a lack of data and experience, creating an initial budget for your startup can be difficult. But this process will only get easier as time goes on!
By Michaela Lenahan in Startups