For people who have regular income, including those who work for someone else or those who have assets that give them passive income regularly, budgeting tends to be easy to manage as the income is predictable and they just need to adjust their expenses accordingly if they slip off.
With regular income, if you fail to stay on track with your budget this month, you can always start again when your salary arrives.
The challenge is when you don’t know when and how much you’re going to receive your next income.
For startups the income is not (and won’t be) as regular as expected. Therefore, budgeting has to be done with extra careful consideration, making sure that you have something to eat when you are not making any money.
Budgeting, in this scenario, is basically writing down all expenses and income, actual and estimated, in a spreadsheet on a regular basis, usually monthly. It’s one of the most essential steps to run a business, and personal life, too, if you wish to have a healthy financial outlook.
Ideally, you’ll have money to cover your most basic living expenses (rent/mortgage/food/bills) for at least 1.5 years because running a startup may sometimes be very tricky and may not necessarily bring any income for the first few months.
Below are 8 essential tips in budgeting for startups:
1. Determine the Fixed Expenses
Fixed expenses are those that do not depend on how much money you make or how often you use the services.
For example, office rent, office supplies, utility bills (they can vary depending on how much you use, but if you work at the same hours, the bills tend to have the same amount of charges, unlimited internet access fee, insurance, lease, debt repayment, interest payment (if you borrow any money), etc.
2. Determine and Estimate the Variable Expenses
Variable expenses are those that depend on how much money you make or how often you use the services.
For example, all expenses associated with sales, from raw materials, commission on sales, production, to packaging and shipping costs. Suppose your products are the ones that need to be physically sent to your customers, this means the more sales you make, the higher those expenses increase.
3. Estimate the Sales Revenue
First, you’ll need to know how to calculate the Break-Even-Point, to determine the minimum amount of sales you’ll need to accomplish to cover the costs for running your business.
FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)
For example, if your fixed costs are $5000, your estimated sales price per unit is $50, and your variable costs per unit is $20, then your Break-Even-Point is 166.66 units. Which means, you’ll need to sell 166.66 units just to cover the cost of running your business.
Also, if your business accepts credits, then you should assume that not 100% of sales can be collected on time. But you’ll need to get at least 85% of your customers to pay on time.
4. Estimate the Tax You May Have to Pay
Note that revenue is not profit. You’ll need to pay tax on profit, not on your revenue. Profit is the amount you have after taking all eligible deductions and expenses relating to running your business. You’ll need to check with your local tax office how much % is the tax you need to pay. If you operate your business under sole proprietorship, then you’re going to pay individual tax, but if you operate your business under corporate, a separate entity, then you’re going to pay corporate tax.
5. Always Have ‘Best’ and ‘Worst’ Case Scenarios for Unpredictable Cases
We’ve all seen how dramatically covid19 has changed the world. We need to take this type of disaster into account. This is why you need to have enough money to cover at least 1.5 years of living expenses.
6. Know What You Will Do With the Excess Profits
Suppose your business runs very smoothly, too smooth in fact, and you end up tripling your profit in a very short period of time, you’ll need to know how you’re going to manage them. Instead of instantly booking a cruise holiday to Hawaii, for instance, you’ll need to allocate the profit accordingly so that despite all potential disasters, you’ll always have some backups for both your business and personal life.
7. Include Fixed Expenses for Your Personal Life
Don’t forget to always include fixed expenses (for food, utility bills, insurance, etc) for your personal life. This is particularly important when you’re operating under individual proprietorship, where you are not legally required to have a separate bank account for your business.
8. Keep Track and Compare
To make sure that you keep track of your budget, you’ll need to record all your spending and income regularly. Ideally daily or at least weekly. And then compare the actual and the planned ones to see if you need to adjust anything. If it doesn’t look good, for instance, the spending is much more than the income, then you’ll need to restrict yourself from unnecessary spending. Here are 6 tips on how to stick with no-spend commitment.
Most importantly, you’ll need to be aware of what it takes to become an entrepreneur: the financial and emotional risks. Here is a post covering that topic.
