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Are you an entrepreneur looking for ways to prepare the most effective budget for your new business? There are more than 31 million entrepreneurs in the United States alone!
Being an entrepreneur can be a challenging but rewarding experience for business owners. Before you open your business, ensure you are ready to overcome financial challenges.
Read on to learn about the 9 steps to helping you create the most effective small business budget!
1. Determine Your Initial Outlay
What will it cost to bring your idea to life? You might not know the answer to this question when you first consider your business, but you need to know it before you open your doors.
Your company’s initial outlay is the amount of money it will take for you to get your business up and running. As a young entrepreneur, you may have countless ideas for your product or service. That doesn’t mean you need to make each of these a reality from the start.
Some of the most important things to consider are the building, inventory, and employee training costs you will need to cover before you open.
2. Revenue Sources
Your company’s revenue sources may not be all that clear when you first begin preparing the budget for your small business.
Will you generate revenue solely from sales of your product or service? Will you also receive financing through a friend or family member that doesn’t expect it to be paid back as a loan?
As you consider this aspect of your budget, you may find that your product or service is better offered as part of a subscription model instead of a one-time cost to your customers.
3. Calculate Fixed Costs
Fixed costs are those that stay the same from month-to-month or from year-to-year.
Sometimes, you will have costs that are fixed for a certain period of time but will become variable later. Some of these shorter-term “fixed” costs may be the rent you pay during the term of your lease or the cost of your product based on contracts with your distributor.
You need to know your fixed costs to have a better sense of what you need to break even as a business owner.
4. Consider Variable Costs
Variable costs are those that change from month-to-month or from year-to-year.
Depending on how much these costs vary, you must be ready to have enough revenue or some financing source to cover them. By looking at your fixed and variable costs, you will get a better idea of the profit margin level you need on your good or service.
Be sure to build-in enough profit margin to give yourself some wiggle room in the event your variable costs increase a little more than expected.
5. One-Time Operating Costs
While the initial outlay is what it will take to get your business up and running, one-time costs are those that you will expect to pay only once.
One of the best examples of a one-time cost to your business can be a franchise fee. These fees are those that you must pay to a franchisor to receive permission and licensing to operate your business under their established model.
These one-time costs are an important piece of the puzzle for your budget because they are necessary to begin running your business.
6. Brainstorm Ways to Limit Spending
Whether you own a small or large business, one of the most important aspects of your operations is what you are spending each day.
Beyond what it takes to keep the lights on in your facility, you need to consider the minimum amounts you need to budget for things like marketing and promoting your business.
One of the ways you can help limit your marketing costs is to hire a web design business to ensure your company website presents your business in a professional way on the internet.
7. Keep an Emergency Fund
The COVID-19 global pandemic has taught businesses around the world the importance of having cash on hand to cover expenses.
Although some businesses purchase business interruption insurance, many of these policies have exclusions for epidemics like the coronavirus. What will you do when your business income is negatively impacted by circumstances out of your control?
Keeping an emergency fund on hand will give you the cash to help whether through a financial downturn that limits your opportunity to generate revenues.
8. Predict Expected Profitability Timeframe
There are many businesses that don’t become profitable for years after the first begin operating.
Despite being valued at over $210 billion, the automaker Tesla has still not turned a profit. Even businesses like Amazon did not have a profitable year until it had been in business for almost seven years!
You need to have a good sense of when you expect to be profitable so that you have more confidence in your business plan and the financial viability of your business.
9. Decide If You Need Financing
Despite your best efforts to avoid it as a small business owner, you may need financing to open your company.
Credit lines for businesses are not an uncommon practice for companies of all different sizes. You may be surprised to learn that many companies begin being publicly traded on a stock exchange as one way to raise capital for operations.
Your credit line as a business owner should be big enough to finance your business but used carefully for only what is necessary. Your business will be on the hook for paying back this loan, so you will need a favorable term and interest rate!
Wrapping Up: The Best Small Business Budget
The best small business budget will be the one that fits your unique needs and circumstances.
Starting your own business can be a stressful experience, but creating a budget with a focus on fiscal responsibility is important for your short- and long-term success. It will also give you peace of mind as you begin to bring your product or service to the public for the first time.
Are you interested in learning other great tips and tricks to help you with your business? Check out our blog posts for other effective ways to take your company to the next level!