How To Create a Business Startup Budget

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BY JEAN MURRAY

Updated July 17, 2018

One of the most important tasks the new business owner must tackle is to create
a budget for the new company, so you can see expected income and expenses and
cash needs. Your budget is also a key component of your startup business plan.

Since you have no past information to go on, you must create the budget using your
best guess on income and expenses (otherwise known as a profit and loss statement).
This "how to" will focus on business with an inventory of products but it will also discuss
a service business with no products.

Before you begin, consider why you need to spend the time to create a budget. Even if
you don't need bank financing, creating a budget is still a valuable exercise for any new
and continuing business.

Some things to think about before you begin:

 What do you need to open the doors of your business on the first day?
 What will your fixed and variable costs be on a continuing basis?
 What can you contribute to keep costs low (furniture, for example)?
 What can you get as donations from friends and relatives?
 What can you do without (pictures, decorations)?

The less you need for startup, the sooner you can start making a profit.

Business Startup Budget - Step by Step

Difficulty: Average Time Required: 2-10 hours

Step 1 - Plan for "Day One" of Your Business Startup

Begin by determining what you will "day one" of your business, in order to open the
doors (or take your website live) and begin accepting customers.

A "day one" start-up budget can be broken down into four categories (depending on
your situation, some of the categories may not apply to your business.) The categories
are:

 Facilities costs for your business location - rental or purchase of a store, office,
warehouse, etc. If you are working from home, you probably won't have location
costs. Facilities costs include lease security deposits, tenant improvements, and
signage.
 Fixed assets (sometimes called capital expenditures), for furniture, equipment,
vehicles needed to set up your location and start your business. These assets
include computers and machinery, and anything for your office that is needed to
set up your business.

 Materials and supplies, like office supplies, advertising and promotion

materials. You will need an initial supply of these to get started.
 Other costs, like the initial attorney and accounting set-up fees, licenses and
permits, insurance deposits, and fees to set up your business type.

In your listing of these startup costs, include items you are contributing to the business,
like a computer and office furniture. Note these items so you can get credit for them
as collateral.

Step 2 - Estimate Monthly Fixed and Variable Expenses

Gather information on your fixed expenses each month. These are expenses that don't
change and aren't dependent on the number of customers you have. Here is a list of the
most common monthly fixed expenses:
  Rent
 Utilities
 Phones (business phones and cell phones
 Credit card processing - monthly fees (transaction fees are variable)
 Website service fees
 Equipment Lease Payments
 Office Supplies
 Dues/Subscriptions
 Advertising, Publicity, and Promotion commitments, like social media, online ads
 Business insurance
 Professional fees (legal and accounting)
 Employee Pay/Benefits
 Misc. Expenses
 Business Loan Payment

Then add variable expenses. These are expenses that will change with the number of
customers you work with every month. These might include:

It will be easiest to get a cost per unit sold for the next step.

 Commissions on sales
 Production costs
 Raw materials
 The wholesale price of goods to be re-sold
 Packaging and shipping costs.

Step 3 - Estimate Monthly Sales

This is probably the most difficult part of a budget because you don't know what sales
will be for a new company. You might want to do three different sales projections:

 Best case scenario, in which you show your most optimistic estimate for first-year
sales
  Worst case scenario, in which you show your least optimistic scenario, with very
little sales during the first six months to a year
 Likely scenario, somewhere in between. The likely scenario would be the one to
show your lender.

Include a calculation of collections percentage

To be realistic in your budgeting, you must assume that not all sales will be collected.
Depending on the type of business you have and the way customers pay, you might
have a greater or smaller collections percentage.

Include a collections percentage along with your estimate of sales for each month. For
example, if you estimate sales in Month One to be $50,000 and your collection
percentage is 85%, show your cash for the month to be $42,500.

Calculate the variable costs of sales for each month based on sales for the month. For
example, if your estimated sales for a month are 2,500 units and your variable costs are
$5.50 per unit, total variable costs for the month would be $13,750.

Add monthly variable costs to monthly fixed costs to get total monthly costs (expenses).
You might want to calculate your break-even point to include with your budget.

Step 4 - Create a cash flow statement

Combine by combining total costs with total sales and collections for each month. The
monthly totals will look something like this:

 Monthly sales $50,000

 Collected $42,500
 Total fixed costs $26,900
 Total variable costs $13,750
 Total cash balance $2,150

The $2,150 represents your total cash balance for the month, not your profit.
By changing your sales figures using the three scenarios above, you can see the
result in your cash balance at the end of each month. This cash balance can give you
information about your cash needs and how much you might need to borrow for working
capital.

Tips for Creating Your Business Startup Budget

1. Use your accounting software program to create your budget, so you can use
existing accounts and make changes more easily.
2. If you don't have an accounting software program, you can use a spreadsheet
program.
3. Most lenders require three years of cash flow statements on a month-by-month
basis, and three years of quarterly and annual Income Statements (P&Ls).

Income taxes are a variable expense, and you don't know what taxes you will have to
pay until you calculate your net income. Don't include taxes in fixed expenses or
variable expenses but make these a separate category.
ACTIVITY 1: QUARTER 4

1. LIST DOWN YOUR START UP BUDGET PLAN ON A MANILA PAPER OR HAVE IT PRESENTED USING A
SLIDE DECK PRESENTATION. PLEASE DO SPECIFY THE COSTS AND BE “TRUE” TO EACH. THERE WILL BE
NO LIMIT AS TO YOUR OWN BUSINESS BUT BEAR IN MIND ALL THE TIPS FROM THE ARTICLE ABOVE.

2. PRESENT YOUR BUDGET ON CLASS IF TIME PERMITS.