How to Organize Your Budget When You Start a Business
Opening your business proves daunting and exciting. Once you think of the perfect idea and get it down on paper or plan it out on the computer, you may want to simply jump in and start.
Eh. Plan everything out first.
Research and author a business plan that covers all the fine points of what you want to do. Your business budget, budget summary, and budget descriptions form a hugely important part of your business plan.
You might think that since you plan to bootstrap your funding, you do not need a business plan or budget.
Think again, my friend.
If you plan to bootstrap when you start a business, you need the budget even more. You need to plan each dollar in advance. You must set priorities and budget for them.
If you plan to obtain a business loan, you need the budget sections of the business plan to gain bank or credit union approval. All major financial institutions require a business plan in order to obtain a business loan.
If you plan to seek an angel investor or venture capital, you definitely need a business plan with obscenely complete budget sections. You also are getting ahead of yourself because you need to have founded your business and developed your minimum viable product (MVP) before you think about trying to score any major funding from adventurists or angels.
How To Organize Your Budget To Start a Business
So, you know you need a budget. How the heck do you get started, you ask?
You know me. I suggest you grab a cup of coffee and maybe a snack. Park yourself in front of the computer, and let’s go through the steps to business budgeting together.
Obtaining the Right Budgeting Tools
You wouldn’t build a house with a nail file. You need the proper tools. You would have a hammer, nails, drills, electric saws, etc.
Building a business budget also requires the right tools for the job. You can find a bevy of online budgeting tools from which to choose. You should start with a budget planner app though.
This website or computer or mobile app lets you plug in numbers and model multiple scenarios easily. Many of these planner apps let you either plug in the monthly amount you plan to generate or your startup capital or to create categories and have the program generate a suggested budget for you.
All of these options provide an acceptable budget, but not every method will work for your situation. The first and most important factor to consider is your financial situation. Whether you plan to bootstrap funding or obtain a bank loan, you need to tightly budget when you start a business. Learning to make do with what you have got, as my dad advocated, prepares you for tough times. You can take a glance at The Wall Street Journal or New York Times’ business section to read about numerous businesses that were overspending when the COVID-19 pandemic hit. Some of those businesses got hit hard when business as usual suddenly became impossible.
So, plan ahead. Learn to stretch your budget, not the truth. Start out with a specific plan and every dollar allocated. Be honest with yourself and create a realistic budget from the beginning. This method helps you succeed when you start a business.
Benefitting from the knowledge of others remains one of the biggest advantages of using a high-quality budgeting planner. When you begin your first business, you have yet to know the ropes. These apps help you catch the things you might miss like costs for monthly website hosting, commercial insurance, software subscriptions, etc.
You probably think in terms of creating the service or product. You might have conceived the cost of doing business as just the raw materials for the product and what it would take for you to assemble it. There’s so much more to it than that, and the planner apps help you create a realistic budget that encompasses it. You will also find some that help you with the accompanying documentation of the budget in text form.
What the Heck Is a Budget Summary?
I figured you would ask that. Most people do unless they came from academia, otherwise have grant application writing experience, or have authored a plethora of business plans.
The budget summary functions as the executive summary of what you want money for and specifically how you will spend it. It provides a summary of the budget description that the lending agent can read quickly to determine how realistic your budget and business needs really are.
Those Budget Descriptions
Your business plan requires a line-item budget. The term line-item budget refers to a monetary plan divided into categories, then sub-divided into specific costs.
For example, you might have an office supplies category, but paper clips would be a line item, pens would be another line item, steno pads would be another line item. My example is slightly facetious, for if you have ever written a grant application for a federal government grant, you know that they really do require an insane level of realness. A more serious example might be a category of computer equipment with a line-item for laptops, one for desktops, one for servers, one for printers, etc.
But, hey, Carlie, that is still numbers. What about this description thing?
Well, each of your budget categories must have a textual description that explains what equipment, supplies, materials, etc. you will purchase with the money in that category. You will explain each line item in a succinct manner.
This discussion of the budget categories and line items provides an explanatory context to the budget numbers. It tells the funding institution why you need money for the specific item. In the case of grants, most organizations want to fund needs even if that isn't listed as a specific criterion. They want to know that they aren’t awarding thousands of dollars for new computers to an organization that just updated the equipment for its entire IT department three months beforehand.
The budget summary and descriptions also help a funding institution to determine whether an applicant practices budget padding or if they accurately budget. Budget padding refers to the practice of lying in your budget. Padding a budget bears similarity to exaggerating the size of the fish you caught. Your budget numbers might say you have allocated $3,000 for the line item of laptops, but you get caught as budget padder when you state in the description and summary that it will cover one laptop. The funding agents know the relative cost of each piece of major equipment. You would raise eyebrows and make the funding agent wonder where you plan to reallocate or siphon that extra $1,000 to $1,500.
Start Taking Care of Your Finances. The Budgetry Store Is Here to Help.
The Mundane Budget Needs
When you start a business for the first time, you probably have no idea what budget categories you need. You may have a personal budget, or you might be the type to wing it. Do not try to wing it with a business budget. Your business will fail. You need to know every bill and how you allocated each dollar, heck, each penny.
You might plan to copy the budget categories from an online worksheet or from the planner app you download. That works so long as you will genuinely have the same expenses.
For example, most of the apps and worksheets have a category for office rent. You do not need that if you work from home. You do not pay rent for an office.
You do, however, need to know the percentage of your home you allocate to running your business. You will require this information at tax time since it comprises one of the many deductions for running a business.
The upshot is that you have to take what the app or worksheet offers up with the proverbial grain of salt. You may need to add categories the budget planning app did not think to add, or you may need to subtract some.
Your budget needs to fit your needs. That means it needs to fit your specific business.
Now, before you start cutting categories that you think you do not need, let’s look honestly at running a business in 2022 and beyond. You might look at those categories and say, “I am gonna cut advertising and social media. I don’t need that crap.”
Um, yeah. You do.
If you bootstrap, no person sees your budget except you. If you want outside money, every financial institution to which you apply will see your budget and business plan. If you left out marketing, they will turn you down flat because they reasonably will wonder how the hell you planned to get people to buy your product when you did not allocate money to tell them about your product. Your advertising line item proves just as important as your Internet Service Provider or your telephone line item.
You have to consider each item and research its importance
Weigh keeping it not by your own opinion, but by objective quantitative and qualitative data. What you think unimportant may decide the fate of your business venture.
How much have you budgeted for your website? I do not simply mean its design or its hosting. How much have you allocated to its development? The Internet lost its newness years ago, and today, everyone expects every business to not only have a website but have a spiffy one that provides engaging content that solves consumer problems while selling products. You would need a line item for the following:
web hosting
web design
content development
advertising
social media promotion
graphics and photos
videos
search engine optimization (SEO) and local SEO
Your website requires a blog with regularly updated content. This content does not get to remain static. You need blogs that engage the public by educating them while entertaining them. This process means creating blogs that explain how your products or services solve their problem, called their pain point in marketing.
Your blog becomes a marketing and public relations tool that helps you draw in new clients by linking your products and services to their pain points and showing how your offerings solve their problems.
So, with that slightly preachy segue into why a budget category or line item you think unimportant might actually top the list, let’s return to mundane budget discussions.
final thoughts
Where do you find this all-important information when you begin your first business? How do you know what you need to include in the budget?
You find ways to see what other businesses like yours include in their budgets. You have a few ways to sneak a peek at this information.
1.You can just ask nicely. I am being serious. You might open a business that would only have local competitors, but you know someone in another state who runs the same type of business. So long as they successfully run their business, ask to see their budget and use it as a model. You are not their competition, so they probably will not mind sharing it with you.
2.Conduct a competition analysis of the businesses in your area that will compete with yours. This competition analysis should turn up information on whether they applied for state or federal grants in the past. You may be able to see some of this information. Another option is if they applied for private foundation money. You may be able to access the budgets from these applications. At the least, most grant programs offer a model budget, meaning an example budget that shows the appropriate categories and essential line items.
3.Financial websites specializing in the industry and sector in which the business you want to start will typically have budget samples. You can download these samples and follow them.
In all three cases, remember to take stock of your personal business needs. This item takes research, too. For example, your city or county may require a business license of every business, including service-driven ones. Your state might require certification with annual renewal or continuing education hours to maintain certification or both. This is the case for certified public accountants (CPAs). You must conduct the due diligence research to determine what line items and budget categories your business has that others may not and include those in your budget.