The phrase ‘you have to spend money to make money’ has worked its way into the conventional business mindset, and unfortunately it has become widely adopted by many firms and entrepreneurs. A more helpful and responsible phrase would be, ‘you have to wisely manage money to make money.’
It is not enough to come up with a great idea and hope to see the fruits of your labor; in short, a business is only as successful as its budget. Whether it is a side-hustle or a dedicated new startup, without a budget you will see your business go nowhere fast. Budgeting and business planning is not easy, but the following budgeting guidelines should help to make this process easier.
Guiding Your Business to Success
Your budget should be seen as a road map on your journey to success. If you have no planned out course, then you are driving around aimlessly and won’t really get anywhere. A thorough budget will also allow you to evaluate how your business is performing and inform you of changes that need to be made to protect the future of your business.
What a budget ultimately does is show you how much money you have at your disposal, how much you need to invest back into your business to meet basic demand expenses, and how much you need to aim to generate as profit to ensure that your business can continue on successfully.
Evaluate your Expenses
Business expenses areas to consider in every budget are:
- Fixed costs – basic operational costs that do not change: rent for office space, insurance, etc.
- Variable costs – costs to meet sales demands: material, production costs, and delivery.
- Semi-variable costs – dependent on increase in demand: labor costs, phone and internet, and advertising.
Fixed Costs
For a startup, working from a home office until the business can sustain an office space is pretty basic; however, you will want to work the cost for an office space into the budget for potential future expansion. Putting aside some money each month for a future office space is a good practice.
Variable Costs
Variable costs need to be accounted for based on demand, so this budget will have to be evaluated on a monthly basis. Ideally you want to plan for this area to steadily increase, and plan to save money accordingly to meet increased demand.
Semi-variable Costs
Labor costs will change as business increases, as will phone and internet demands, so again, these need to be accounted for in a future planning capacity. However, one cost that can be considered from day 1 is your company website. A website is a central component to any modern business, as it serves as the flagship of your brand online, so you need to carefully consider how to balance price and quality when selecting a provider to host your website. Although you should originally start with lower-cost options and expand from there as business increases, you should remember to keep website expansion costs in the budget for present and future. This is not an area to neglect and can mean the difference between flourishing and floundering.
In Summary
Ultimately, drafting a budget will help you to visualize your business goals in a clear and realistic way, and help you to reach those goals. Your budget will help you track your revenue, the expenses that come out of that revenue, and how much you need to take in in order to keep your business growing. Moreover, a good budget can help you anticipate current or future problems and fix them promptly, and can help you anticipate future demand, expenses, and profits.
Creating a budget and preparing it well can really bring us a long way! Thanks Pauline.
Good points to help anyone create a business budget. There’s always hidden costs that tend to creep up during the first initial set up days. Good luck
This is some great advice. Many people don’t categorize costs based on the behavior (fixed vs. variable). But you can look at your business and projected revenue and do some great analysis on the overall profitability of your start up by understanding the differences between your fixed and variable costs (CVP analysis).
I wished I knew this when starting my small business 6 years ago. Drafting a budget would have helped me get better results sooner, but it finally worked out well. It’s true I had to work extra to make up for my mistakes 🙂
Pauline,
Having a good budget lined out is always the way to go. Thankfully for us, costs are relatively low in the digital world, so it makes things a bit easier.
This would definitely be a good read for anyone just beginning to build their startup! Great post Pauline 🙂
Great article. Most people only think about start-up expenses in terms of advertising. Thanks for covering the thing most start-ups often miss!