How to create a healthy startup budget in 6 steps
Every dollar plays an essential role in a startup budget. If you’re anything like the majority of small business owners, you’re starting up with less than $50,000 in the bank.
On top of that, many startups adopt aggressive growth-hacking practices, aiming to make the greatest impact with the smallest amount of money. That leaves little room for vague financial planning and surprise cash shortfalls. Yet one survey showed that 61% of small business owners don’t have an official budget.
Budgeting and forecasting can be daunting, so we’ve condensed the process into a simple, step-by-step guide. Build a budget that lets you estimate your business startup costs, monitor your cash flow, and stay lean from day one. You can follow these steps whether you’re using accounting software, a digital spreadsheet, or pencil and paper.
Who needs a startup budget?
A startup budget is a simple breakdown of how you plan to use your capital and cover expected business costs. Whether you’re pre-revenue or a later-stage tech company, a budget is indispensable.
Before you launch, a budget is the ultimate tool for determining how much money you’ll need to make it through the first few months. At this stage, it will be a realistic projection using market research and your best estimates. Without this roadmap, you may run out of cash too early or spend funds ineffectively.
After you’re up and running, your budget becomes an analytics tool. You’re able to see how you’re actually allocating resources and whether your team is spending and earning the way you envisioned. This helps you discover important questions and hit on opportunities for cost savings and business investments early on.
For example, if paid advertising is your largest expense category, is every channel funneling high-quality leads? Do you need to negotiate longer payment terms to free up funds for slow months? Is your spend truly aligning with each team’s key performance indicators (KPIs)?
Well-crafted budgets offer direct answers or point you in the right direction.
Why budgeting is crucial to success
Developing a startup budget doesn’t just let you avoid early financial missteps. It helps you make informed decisions in the long run. Here are a few more reasons startups need to allot time for regular budgeting:
- You can determine when to hire employees, buy equipment, and otherwise invest in your business.
- You can finance to scale using actual business data and avoid fundraising too early or over-borrowing.
- You can better estimate your break-even point and adjust variables as needed.
- You can predict cash shortfalls and line up funds or negotiate with suppliers and lenders early.
- You can identify retained earnings ahead of time and develop a plan for them.
- You can pinpoint extra cash to build your startup’s emergency fund.
- You can generate accurate financial statements, like a balance sheet or income statement, to share with investors and lenders.
A good plan executed today is better than a perfect plan implemented next week. Let’s dive into the 6 steps for crafting your startup budget so you can see the benefits.
How to create a startup budget in 6 steps
You can create a useful startup budget without estimating costs down to the cent or perfectly predicting the future. It’s normal for a new company to forecast figures based on market research, competitor analysis, and vendor quotes. You may already have some of these numbers from your research and development process.
The most important thing to remember is to be conservative with your assumptions and projections. It’s better to underestimate revenue and overestimate expenses than the reverse.
Now, let’s go over how to define your revenue and expenses, analyze the results, and make adjustments.
Step 1: Gather your tools and set a target budget
You can grab a notebook and manually create your startup budget. Or, speed up the process with the budgeting features in popular business accounting software. If you integrate your other financial tools, such as your business bank account, your general budget will update automatically. No need to go digging through each individual app to find your monthly spend.
A spreadsheet program like Google Sheets or Microsoft Excel is another user-friendly budgeting option. In any case, there are many free startup budget templates to utilize. Choose one with an intuitive layout and the timeline you need. Enter sample numbers into the spreadsheet to test the formulas. That way, you don’t input hours of data only to find out the spreadsheet doesn’t work.
Setting an upfront budget goal will help you stay on target as you tally up your must-have and nice-to-have purchases. Don’t forget to factor in a starter emergency fund. Experts recommend having cash for at least three months’ expenses. Although this may be out of reach at first, budget what you can for contingencies.
When budgeting, entrepreneurs start with expenses because they’re much easier to predict. Let’s get started.
Step 2: List your essential startup costs
Startup costs are the expenses you incur and assets you buy before launching your company. These are the priority purchases—the resources you absolutely need to establish your business and start selling.
There are two kinds of startup costs you’ll need to account for:
- Startup assets: These are one-time purchases of liquid and non-liquid assets like inventory, computers, furniture, vehicles, property, and security deposits. Keep in mind that startup assets, also called capital expenditures, aren’t tax deductible.
- Startup expenses: These are the fixed or variable expenses that you pay before opening. Rent and payroll, for example, are considered to be startup expenses before you launch. Startup expenses are tax deductible.
Other examples of startup costs include office space, organizing fees, trademarks, and patents.
Break down each expense where possible. For example, you won’t pay a lump sum for "website costs." List a web domain, content management system, online shopping cart, design, photos, and anything else you may buy separately. Check out the typical price range for common startup costs.
Step 3: Determine your fixed costs
The next step is to estimate your fixed costs, also known as overhead costs. These are business expenses that largely remain the same each month.
A new company could have monthly costs like:
- Rent or mortgage
- Payroll and benefits
- Business insurance
- Website hosting
- Internet and phone services
- Professional services
- Bank fees
Don’t forget to budget money for spending related to each fixed cost. For example, if you hire an in-house social media specialist, they require more than a salary and benefits. They’ll need equipment for the job, like a desk, laptop, and marketing software. Review this list of business expense categories for more examples of fixed costs.
Step 4: Estimate your variable costs
Variable expenses increase or decrease in response to your sales and production, so they don’t typically have a set monthly cost. As you scale up, these costs generally go up, and vice versa.
Here are some examples of variable costs:
- Raw materials
- Advertising spend
- Shipping costs
- Business income taxes
- Travel and events
- Freelance services
New business owners can request quotes from manufacturers, contract workers, and third-party logistics providers (3PLs) for many of these costs. Or, use industry averages. Consider how time of year and season affects each cost, too.
With both fixed and variable expenses, round up to give your budget some realistic padding. For example, if a subscription service is $17.26, you could allot $18-$20. Some experts suggest doubling or tripling estimates for categories that tend to fluctuate, like marketing and advertising or legal services.
Step 5: Calculate your monthly revenue
Next, you need to forecast your earnings for each type of income source. Without past sales data for your business, it’s best to create at least two sets of revenue projections: an optimistic projection and a conservative projection.
Use your customer personas to estimate how often they’ll buy your goods or service. Consider factors like your total addressable market, potential market share, and current market conditions. You can also derive a monthly sales estimate using your break-even analysis. Be realistic about any factors that could limit monthly revenue growth.
Here is a list of potential revenue and funding sources:
- Product or service sales
- Business or corporate credit card
- Investment income
Now, let’s determine whether your startup costs and operating expenses match your initial target budget.
Step 6: Tally up your total costs, then review and adjust
Add your monthly cost estimates into your business budget template and calculate how much you’ll need to get started. Hopefully, you’ve built in padding for overspending and emergency funds.
It’s normal to assume some deficit spending in the early months of a new business. But if your budget goal sounded significantly better on paper, you can make adjustments before borrowing more capital.
Go back through your expenses and label each item as necessary (must-haves) or discretionary (nice-to-haves). Decide which costs you can eliminate, reduce, or save for later, starting with discretionary costs.
Can you go without a project management tool or use the free plan? Is a public relations (PR) consultant really necessary in the early launch phase? Can you start in a coworking space and find used office equipment?
Good budgeting for a better business
A startup budget is the first line of defense for an early-stage business. It’s a flexible action plan that lets you adapt to changes and anticipate cash shortfalls. And if you take the time to make a well-defined budget, you already have the edge on two-thirds of the competition.
Business budgeting and accounting go hand in hand. Read the quick guide to small business accounting to learn how to track expenses and manage your finances going forward.