An impressive 432,834 new business applications for tax identification numbers were submitted during October 2022, according to the U.S. Census Bureau. Indeed, despite the relatively higher costs of doing business these days, plenty of Americans are still starting a new business.
One thing that every new company needs, along with a business plan, is a sensible start up budget. And that holds true for well-established entities as well. Let’s review some fundamentals of budgeting for start-ups, which can also apply in some shape or form to companies that have been around for a while.
Many businesses that have been up and running for a while base their budgets on the previous year’s financial results. Of course, start-ups lack historical financial statements as well as hiring a startup CFO. As such, this can make budgeting difficult.
For the first year of operation, however, an entrepreneur can create an annual budget by forecasting the monthly numbers that will likely be reflected in the three basic parts of their financial statements:
Start your annual budget by estimating how much you expect to sell each month. Then, estimate direct costs (such as materials, labor, sales tax and shipping) based on that sales volume. Many operating costs (such as rent, salaries and insurance) will be fixed over the short run.
Once you spread overhead costs over your sales, you might not be able to report a net profit in your first year of operation. Don’t panic! Profitability takes time and hard work. Once you turn a profit, however, remember to save room in your budget for income taxes.
To start generating revenue, you’ll also need equipment and marketing materials — including a website. Other operating assets, such as accounts receivable and inventory, typically move in tandem with revenue. How will you finance these assets? Entrepreneurs may invest personal funds, take out loans or receive money from other investors. These items fall under liabilities and equity on the balance sheet.
This report tracks sources and uses of cash from operating, investing and financing activities. Essentially, it shows how your business will make ends meet each month. In addition to acquiring assets, you will need to cover fixed monthly startup business expenses.
By forecasting these three statements every month for at least a year, you can identify when cash shortfalls, as well as seasonal peaks and troughs, are likely to occur. Naturally, you should expect to adjust the budget occasionally or even frequently to account for miscalculations and macroeconomic forces.
We can help you put together a realistic budget based on industry benchmarks and market research into the likely demand for your products or services. And, again, even if your company has been operating for a while now, you may be able to gain some helpful insights from having an objective professional review your start up budget.