OMG Digital Magazine July 23rd, 2015 - Vol 4 Issue 168 | Page 25

OMG Magazine | Thursday 23rd July, 2015 • PAGE 25

How to create
a budget for
your startup
In their book Start Your Own Business, the
staff of Entrepreneur Media Inc. guides you
through the critical steps to starting your
business, then supports you in surviving the
first three years as a business owner. In this
edited excerpt, the authors discuss the basics
of creating a projected budget for your first
year in business.
For many small-business owners, the process of budgeting
is limited to figuring out where to get the cash to meet next
week’s payroll. There are so many financial fires to put out in
a given week that it’s hard to find the time to do any short- or
long-range financial planning. But failing to plan financially
might mean you’re unknowingly planning to fail.
Business budgeting is one of the most powerful financial tools
available to any small-business owner. Put simply, maintaining
a good short- and long-range financial plan enables you to
control your cash flow instead of having it control you.
The most effective financial budget includes both a shortrange, month-to-month plan for at least a calendar year and
a long-range, quarter-to-quarter plan of at least three years
that you use for financial statement reporting. It should be
prepared during the two months preceding the fiscal yearend to allow ample time for sufficient information-gathering.
The long-term budget should be updated when the shortrange plan is prepared.
Many financial budgets provide a plan only for the income
statement; however, it’s important to budget both the
income statement and balance sheet. This enables you to
consider potential cash-flow needs for your entire operation,
not just as they pertain to income and expenses. For instance,
if you had already been in business for a few years and were
adding a new product line, you’d need to consider the impact
of inventory purchases on cash flow.
Budgeting only the income statement also doesn’t allow a full
analysis of the effect of potential capital expenditures on your
financial picture. For instance, if you’re planning to purchase
real estate for your operation, you need to budget the effect
the debt service will have on cash flow. In the future, a budget
can also help you determine the potential effects of expanding
your facilities and the resulting higher rent payments or debt
service.

IN THE STARTUP PHASE, YOU WILL HAVE TO MAKE
REASONABLE ASSUMPTIONS ABOUT YOUR BUSINESS
IN ESTABLISHING YOUR BUDGET. YOU WILL NEED TO
ASK QUESTIONS SUCH AS:

• How much can be sold in Year 1?
• How much will sales grow in the following
years?
• How will the products and/or services you are
selling be priced?
• How much will it cost to produce your product?
How much inventory will you need?
• What will your operating expenses be?
• How many employees will you need? How
much will you pay them? How much will you pay
yourself? What benefits will you offer? What
will your payroll and unemployment taxes be?
• What will the income tax rate be? Will your
business be an S corporation or a C corporation?
• What will your facilities needs be? How much
will it cost you in rent or debt service for these
facilities?
• What equipment will be needed to start the
business? How much will it cost? Will there be
additional equipment needs in subsequent
years?
• What payment terms will you offer customers
if you sell on credit? What payment terms will
your suppliers give you?
• How much will you need to borrow?
• What will the collateral be? What will the
interest rate be?
As for the actual preparation of the budget, you can create
it manually or with the budgeting function that comes with
most bookkeeping software packages. You can also purchase
separate budgeting software such as Quicken or Microsoft
Money. Yes, this seems like a lot of information to forecast. But
it’s not as cumbersome as it looks.
The first step is to set up a plan for the following year on
a month-to-month basis. Starting with the first month,
establish specific budgeted dollar levels for each category
of the budget. The sales numbers will be critical since
they’ll be used to compute gross profit margin and will
help determine operating expenses, as well as the accounts

receivable and inventory levels necessary to support the
business. In determining how much of your product or service
you can sell, study the market in which you’ll operate, your
competition, potential demand that you might already have
seen, and economic conditions. For cost of goods sold, you’ll
need to calculate the actual costs associated with producing
each item on a percentage basis.
For your operating expenses, consider items such as
advertising, auto, depreciation, insurance, etc. Then factor in a
tax rate based on actual business tax rates that you can obtain
from your accountant.
On the balance sheet, break down inventory by category. For
instance, a clothing manufacturer has raw materials, workin-progress, and finished goods. For inventory, accounts
receivable, and accounts payable, you will figure the total
amounts based on a projected number of days on hand.
Consider each specific item in fixed assets broken out for real
estate, equipment, investments, etc. If your new business
requires a franchise fee or copyrights or patents, this will be
reflected as an intangible asset.
On the liability side, break down each bank loan separately.
Do the same for the stockholders’ equity—common stock,
preferred stock, paid-in-capital, treasury stock, and retained
earnings.
Do this for each month for the first 12 months. Then prepare
the quarter-to-quarter budgets for Years 2 and 3. For the first
year’s budget, you’ll want to consider seasonality factors. For
example, most retailers experi