Creating a budget for your business may seem like a daunting task, but it's a vital step in your business's development. In fact, you'll probably need one as part of your business plan. A business budget can take multiple forms. At its most basic level, it is a document that shows how much money you have coming in and what you need to spend money on. It also shows how much money you will need to make to continue making a profit and satisfy your expenses.
How do you create a startup business budget?
If your business is new or still in the planning stages, creating a budget is tricky – even with a template – because you don't have actual numbers to plug in. Still, it's something you need for your business plan.
This is especially important if you're planning to apply for a small business loan to help you launch your business. Here are five steps to help you create a startup budget so you can start your business off on the right foot.
1. Set your budget goal.
Your budget goal is the total amount you are willing to spend on your business. This helps you establish clear parameters for your budget from the beginning and keep your spending in check.
To set your goal, consider the amount of money you currently have or can realistically obtain. How much makes sense for you to spend? Keep in mind that loans must be paid back, often with interest, and you must not deplete your personal savings. [Read related article: How to Decide Which Type of Business Loan Is Right for You]
2. Categorize your expenses.
For this step, start by brainstorming all of your potential expenses on a budget worksheet. Begin with your startup costs, which are any one-time expenses related to starting your business.
This could include things like a building (if you're buying, not renting), computers and photography equipment. Be specific and write down the exact costs of every item you will need to purchase and any associated costs. For example, to build a website, you will need to pay for a designer, host, domain name, plugins, stock photos and security software.
Next, categorize each item as "essential," "nonessential" or "later." Essential items, as the name suggests, are purchases that are crucial to getting your business off the ground, such as a business license.
Nonessential items are things that will make your life easier but are not crucial to the operation of your business. This can be subjective, but try to look at your business as a whole and use your best judgment.
Later items are things that you can put off for at least six months and are not required for the function of your business, like a fresh coat of paint for your building. Add up your essential and nonessential items to get your estimated startup costs.
3. Estimate your losses.
Your losses are how long you will go without turning a profit while accumulating overhead expenses. Losses are a result of a new business needing time to build a customer base, and your budget must reflect them.
Start by calculating your estimated monthly overhead costs. These are things you will need to pay for more than once that are not tied to your business's product or service, such as subcontractors, payroll, software subscriptions, website fees, rent and advertising fees. This will create your operating budget.
Next, estimate how many months you will go without revenue. It can be difficult to forecast your income when starting out, so begin with the number you will need to hit to break even, and then use that number to come up with an educated guess.
4. Build in a safety net.
Many small business owners exceed their budgets. It is easier to do than many think, given the unpredictable nature of starting a business. Build some financial padding into your budget to cover you in the event of unexpected costs. Think of this money like a vehicle's airbags; they're used only in a true emergency. To create your safety net, add 10% of each expense in your startup budget, and add 15% of your monthly operating costs.
5. Refine your budget.
Now that you have some rough numbers to work with, it's time to tighten them up to make your budget more actionable.
Start by going through your nonessential startup items. Is there anything you can cut out or move to the "later" category? Can you reduce the cost of any items by, say, buying something secondhand or trading labor?
Next, look at your overhead costs. Determine if any of them are unnecessary, at least while you're starting out, and can be cut.
You can also reevaluate your essential costs if you cannot get your budget to balance. Go through them with a trusted friend or colleague to determine if they are all truly essential to start your business.
What is a business budget template, and how do you choose one?
The good news is that you don't necessarily have to create a budget from scratch. There are a number of preexisting budget templates you can use. Budgets can be complicated, so you may want to download a template if this is your first time creating a business budget.
A small business budgeting template is a handy tool that gives you a place to record all your numbers in an organized way, making your budget easy to read and update.
As it can be complicated for first-time entrepreneurs to create a budget from scratch, it is nice to know there are a number of preexisting budget templates you can use. Even if you choose to create your own, it may be helpful to refer to templates or sample budgets to keep yourself on the right track.
What does a business budget template include?
If you've never used a business budget template before, you may feel slightly confused. Our budget template comes with five tabs. To get started, rename the first tab with your business's name.
Once you do that, it will automatically fill in the other pages. Let's look at a breakdown of each of the other four main tabs:
The annual budget tab looks at how much money your business brings in each year. Use this tab to input your company's yearly revenue and expenses. You want to be as specific and detailed as possible because this information is used throughout the budget template.
The monthly budget tab looks at your monthly expenses. You'll notice that since you already filled out the annual budget tab, that information has been prorated, so you have monthly estimates for each of your yearly totals.
Each month's budget is weighted equally by default, but you can change this by updating the percentages in line 5. Just keep in mind that your percentages must add up to 100.
The monthly actuals tab is used to track your actual expenses and revenue as they come in each month. This lets you see how much money your business is bringing in.
Finally, the overview tab shows how your actual numbers compare to your budget. It gives an overview of your annual and monthly budgets. This information helps you to see where your business is doing well and to identify areas for improvement.
To see your finances for a particular month, you can select that month from the dropdown list in line 4.
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Why do you need a business budget template?
A business budget template is vital to keep your expenses and financial goals up to date. A good template makes it easy for you to see how much money you have available, what you need to pay for and how much money you have left after covering your necessary expenses.
It will show you if you can grow your business, give yourself or your employees raises, and purchase inventory and assets. If you don't have sufficient money coming in, it will show you which bills you don't have the funds to pay or if you are nearing bankruptcy.
If you need to apply for loans or grants, the applications may ask you for a monthly or annual budget, as well as an income statement or balance sheet, to give the lender an idea of where your business stands financially and how you manage your money.
For these reasons, it is in your best interest to have an up-to-date budget from the beginning.
Kiely Kuligowski contributed to the writing and research in this article.