You’ve decided to start a business? Congrats! It’s important to remember that while you’re an expert in your swimlane you’ll also need to pick up some accounting skills. One of the best ways to level up that skillset while also creating an invaluable tool for your business is by building your company’s first budget.
Why Create a Budget?
Ask yourself, do you know where your money is going? If you’ve decided to make your side hustle your main focus, how do you plan to grow? What will you need to purchase in order to become operational?
Take the time to evaluate your expenses and understand where your money will be spent. While you go through that process keep in mind:
• Your budget is a planning tool, one that could make or break your business. Figuring out where and how your money is being spent will also let you know if you’re trending towards a surplus or a deficit
• When you have a financial plan, you can help make sure you have enough money for what you need in order to continue operating and growing your business without needing to go into unplanned debt
• Planning for the short and long term will help you control your cash flow, instead of it controlling your business.
How to Project Your Costs
79 percent of small businesses fail because they don’t have enough money to even launch their product.
When projecting costs, the hardest (and most rewarding) budget you’ll ever write is your first one. After you write your initial budget, you will begin to develop your business based on that model.
• Know your start-up costs. Input values into a spreadsheet in order to visualize what’s required to get your business off the ground. What will materials, assets, insurance, labor, marketing and other aspects of your business cost? Do your research. These values will help you avoid unforeseen costs.
• Revise, revise, revise! Projecting costs is an ongoing process. In order to maintain accuracy, you may need to continuously tweak.
The Most Common Mistakes and How to Avoid Them
When you better understand some of the common mistakes made by others, you can use that to your advantage. Here’s a quick list to keep you on your toes, ensuring that you dodge what potentially doomed others.
• Not having a strategy — Whether you create a budget and don’t follow, it, underestimate your costs or develop unrealistic sales projections, you need to create strategies for all aspects of your financial business plan. Remember to always weigh the cost-benefit of each decision you make. Check out the Envelope Budget System – the most commonly used for budgeting at home but it’s also a great way to budget for your small business.
• Not accounting for business taxes — The figure sitting in your bank account may seem healthy, but you don’t technically own that balance. Do not count your sales tax revenue as holdings, as you may budget for a future project that you cannot actually afford. Always set aside this money and make quarterly payments so that you’re not swamped during tax season. Also, keep all of your records.
• Being too aggressive — Receiving funding can create a false sense of security. If you immediately hire a few employees, rent equipment and sign a contract with a distributor, you can start to sink. Be conservative with your budget. Don’t jump the gun just because there’s a bit of money in the bank.
On that note, just remember this saying — “Rich people stay rich by living like they’re broke, and broke people stay broke by living like they’re rich.” Approach your new business with this mentality, make every dollar count.