Learn how to get started with an effective business budget.
Beginning a new business can be one of the most exciting periods of your life. You will have all sorts of ideas and dreams about how much of a success your new business will be. Before you start following all of your flights of fancy, however, give yourself a reality check and think about your business budgeting.
If you have a good household budget in place, then you will know exactly how important a tool a budget can be. If on the other hand you are a ‘boom and bust’ kind of person when it comes to managing your money, you need to get a budget in place for your business before you ever flip the ‘Open’ sign.
You need to be realistic about how much you have to spend and how much things will cost. For instance, rent, electricity, phone, computer leasing and so on are fixed costs that have to be met every month. How much do you have in start up capital that can pay for these expenses until you have a steady income?
If you have no start-up capital and are trying to ‘bootstrap’ your company to success, you will still need to know what things cost and set any money aside to cover them. If there is anything left over after your fixed costs, then you can re-invest at least a portion of it back into the business. You will also have to set money aside for quarterly taxes and a savings fund for future opportunities and any emergencies that might arise. Then and only then will you be able to pay yourself.
A budget can help your business in several ways:
* Avoid overspending on products; this would eventually lead to you going out of business, or even bankruptcy
* Help when negotiating loans with the bank or other lending institution; they will want to see compelling financials if they are ever to take you seriously
* Balance expenses against income
* Get an accurate up-to-the-minute picture of how healthy your business is financially
* Help to evaluate and set the unit price for products and services—too many new business owners price themselves too high, and right out of the market. Others price themselves too low and get ‘locked in’ to that price with their customers. As they get busier, they are then frozen in terms of income and it can be difficult to raise your rates and still retain your clients.
* Know start-up costs for your business –know what everything costs. Also be realistic about how long things can take to be completed. When in doubt, overestimate, rather than underestimate and then be unpleasantly surprised.
* Know your monthly operating expenses –you should memorize this number. If things are not going well by the middle of the month, take steps to get back on target to earn more by the end of it or else you could be seriously off-budget and need to borrow from your savings to sustain the business. If you have no savings, you will be in trouble.
No one likes the word budget. It is like the word diet. It suggests deprivation and misery. But it does not have to be that way. Just look at your business budget as part of your overall business plan. It is an essential tool for business success in the same way that a hammer is essential for a carpenter or builder and a computer is for an Internet business owner or writer.
Your budget should be a snapshot of what you need to take care of each month to be in business, and stay in business, and keep yourself out of the bankruptcy court. 80% of new businesses will fail within 5 years. Why? Because their owners fail to have realistic expectations or budget accordingly.
Don’t let your business become part of that grim statistic. You work too hard to allow yourself to fail. Keep on track with a business budget, and watch your business grow through your careful money management.