You're in the process of turning this amazing idea or passion project into a full business, and that's great! Even though your business is meant to focus on the creative work or changing the lives of others, including yourself, it cannot escape that one thing, which always comes up whenever we talk about business: budgeting. Having a good budget ensures that your business can actually make a profit and allows for future investors. If your business is not turning an actual profit, you have an expensive hobby, not a business.
What is a budget? A budget is a financial plan that helps you to manage the future income and expenses of your business. It reflects the goals & objectives of your business combined with how you believe your resources will be used. However, it doesn't stop there, a budget serves as the roadmap for your business. It aids in providing a compass for making important business decisions in a more efficient manner to ensure that your business is heading in the right direction. A budget also empowers you to think more about the future and anticipate what could possibly happen in your business, which in turn makes for effective management.
Having a budget sounds good, right? It is! However, we see too often that new business owners don't know how to budget properly and the results - low income with high expenses. Here's a selection of some of the most common mistakes businesses make when planning their budgets:
Underestimating the Costs
When planning a budget, some costs might get underestimated and even completely forgotten. This kind of lapse in judgment might even jeopardize the future of a business. When planning the budget, consider every expense. We even recommend overestimating your expenses to cover unexpected costs.
Overestimating the Profits
We all think our business is so good that everyone will buy into it and this is the wrong idea to have. You need to know the exact Who, How much, and How often you expect to receive income. For example, who is your target customer? How much do you expect them to spend with you and how often? This is called a revenue analysis. The most common mistakes businesses make in this area are: forgetting about the seasonality of business (does your business have high income during the summer months but low income during the fall/winter), overlooking the possibility of customer resignation (customers come and go which affects your expected income) and assuming an overly expansive monthly revenue growth.
No Marketing Budget
No marketing means less or no clients at all. The wonders of our digital era might convince us that a marketing strategy is an unnecessary cost - after all, we can manage our social media channels just fine. Yes, you can manage it, but do you really know what you're doing? If you're being honest with yourself, the answer is no. Which is why your posts will barely get any likes, they won't be shared, and you won't get any traffic.
Generally, the rule of thumb for creating a marketing budget is 5-10% of the projected annual revenues, but every marketing budget should be cut to fit the requirements of the business in question. Go ahead and plan out how much money you will spend on marketing and how you plan to use it.
Having a budget in place is key to the success of any business and here are some reasons why:
- Provides financial insight into your business and sheds light on if your business is financially on the right path.
- Allows you to see if your business is performing as well as you thought it would and allows you to make early adjustments within your business to increase performance.
- Shows potential investors that you're serious about your business and makes your business more attractive to those who are willing to fund your business, like banks, grant owners, or private investors. If you're able to do a good job at managing the money you put in, they'll have the same confidence with the money they contribute.
To get you started, here's a list of general items to include on your budget:
- Production costs: How much money is required to produce the product you're selling? List each item separately.
- Operational costs: How much money is required to operate your business? Do you have to pay for rent, lights, wifi, cell phones, printer, paper, pens, employees, shipping, operational systems, etc. List each item separately.
- Legal costs: When you're just starting out you may not need a lawyer, but having an experienced lawyer on your team is always a good idea. Expected legal costs just starting out, could include your EIN number, business license, permits, etc. List each item separately
- Website costs: Will your business have an online presence? If so, include costs for the web developer/web designer, website costs, domain, apps, plug-ins, etc. List each item separately.
- Marketing: How will you market your business and through which advertising channels? Will you use Facebook, Instagram, etc? Will you run ads on these platforms? Will you make flyers/postcards? List each item separately.
- Accounting: Depending on your business, you may not need an accountant right away. However, when tax time arises, we always recommend using an expert to assist in this area. Experienced accountants and tax preparers ensure that your business taxes are paid and that you receive the most deductions possible.
- Expected Income: How much do you plan to make daily, weekly, monthly, quarterly, and annually? Of course, if you're just starting off it may be hard to get exact numbers but still set goals. You should at least know how much money you need to make to cover all your costs of doing business. Then you should know how much additional income you need to turn an actual profit. When you know these numbers, you can see clearly the steps you need to take to result in your expected income.
We hope the information above is useful in preparing the budget for your new business. If you have any questions about your budget, feel free to contact us here.