Startup budgeting regards how you will use your cash in an identified future period. Financial Projections (previously discussed) involves projecting the forward-looking, revenues and expenses for the business. The business budget is a line-by-line, projection of what amount of money you will spend on given expenses. Adding up these expenses allows the business owner to calculate the amount of funds needed to cover these expenses for the period. In a way, you can think of the business budget as a forward-looking, cash flow statement. The only difference is that budget tends to be far more detailed.
Calculating a Budget
There are generally two approaches to developing a budget. You can take your sales projections and then calculate the expenses that it will costs (operational and marketing) that it will cost to achieve these sales. Another place to start is from projected profits. This means that you subtract the projected expenses from projected revenue. Given this profit goal, you develop a set a budget to cover expenses that will generate a level of profit that hits these profit targets. While most lifestyle businesses employ the second method, growth-based businesses focus sales above profits. As previously discussed, the growth associated with sales is far more important that achieving profits early in the business’ life.
In order to establish a budget, you must have an understanding of the fixed and variable costs and potential revenues. This information must be drawn from the financial projections and is based upon the marketing and operational plans.
Benefits of a Budget
- Allow the business owner to project the specific amount of funds needs for each area of operations or marketing.
- It allows the business to set specific, operational or marketing goals.
- It allows you to measure your return on investment for specific fixed and variable expenses.
- It will allow you to more efficiently use funds to achieve the greatest growth.
- The budget is a tool that allows management to track progress or effectiveness during an operational period.
The financial aspects of Business Budgeting is covered in greater detail in our Startup Funding Resources and Startup Accounting Resources Libraries.