According to a recent study conducted by U.S. Bank, over 80% of all newly formed businesses that ultimately fail do so due to cash flow problems. If you needed a reason to believe that getting your spending in order and dedicating the time to drafting a proper budget for your new startup is important, look no further than that statistic.
If you take the time to properly budget now, you’re mitigating a significant portion of the risk you’re likely to face in the not-too-distant future. If you don’t, or worse—if you assume that you can just “make it up on the fly”—all you’re doing is setting yourself up for disaster. Therefore, if you truly want to make sure that you have the budget you need to continue to build the business you’ve always wanted, there are a few key things to keep in mind.
It Begins by Looking Inward, Not Outward
Maybe the most critically important thing for you to understand is that there is no “one size fits all” approach to creating a budget for your startup. Just as it’s fair to say that nobody does what you do quite like how you do it, that same unique quality must extend into the world of budgeting for your startup business.
Every business is different ‒ so while you can certainly look to some similar organizations for guidance and inspiration, be aware that their path is not one for you to rigidly follow. You need to start the process by looking at your long-term business goals ‒ where are you today, and where do you want to be in a year or five years from now? What are the steps you need to take to help you accomplish that? What are the mile markers you’ll need to hit along the way? Once you have the specific answers to these questions, then you can begin the process of figuring out what budget is most appropriate for your small business.
Once you contextualize everything through that lens, many of your priorities will easily reveal themselves. At that point, your job becomes making sure you’re spending money in a way that supports those goals first, and everything else second.
As you develop your budget, you can even use it as an opportunity to learn more about the business and the way it operates. Once you can better identify how much money you have on hand and where it’s going, you start to better understand things like:
- The money you’re spending on labor and other materials necessary for your products and services;
- Your overall costs of operations;
- The level of revenue you’ll need to generate to support your business moving forward; and
- A realistic idea of how much money you can expect to make in terms of profit, and when.
So, as you develop a budget that is more specific to your growth startup, you also begin to better understand how that startup works. At that point, you’re not just able to make accurate, informed decisions about things like hiring or materials spending ‒ you can also go back and reconfigure your budget to account for any trends or patterns that you’ve discovered. This cyclical process is also a great way to make sure that you always have the cash necessary to take advantage of opportunities as quickly as possible, even ones that you didn’t necessarily expect.
The “Day One” Budget
For the sake of an example, let’s say that you’re planning a budget for a business that hasn’t technically gotten off the ground yet. At that point, your priorities are a bit different as you’re essentially trying to make “Day One” possible. Again, every business is going to be different from the next. But having said that, there are a few key things you will want to focus on to make sure that your opening goes as smoothly as possible:
- Facilities costs – Where, specifically, are you going to do business? Do you need to rent a storefront? Are you working out of a commercial office space? Will you need a warehouse or other logistical assets? Regardless of which one best describes your situation, you’ll need to think about things like security deposits, any cosmetic or structural changes you need to make to the building, and even things like signage.
- Fixed assets – Also commonly referred to as “capital expenditures,” these are things that your staff will need to do the jobs you’ve asked of them. This includes thinking about purchases like work vehicles (if applicable). You’ll also have to buy furniture and other equipment like computers and other technologies.
- Materials and supplies – Costs in this category would refer not only immediate needs like office supplies, but also those related to marketing and other promotional activities in which you might be engaged. You’re going to need a steady stream of all these items to hit the ground running.
- Miscellaneous – These are all the other costs of physically opening a business that don’t fall into the other three categories. You’ll need to work with an attorney and your Tarlow advisor to make sure the backend of your business is in order. Depending on your industry, you may need things like licenses and permits, which can be costly.
Remember: these aren’t necessarily the costs associated with running your business in the long-term. These are just the things you’ll need to take care of to make sure you’re prepared to open your doors in the first place.
Get Your Priorities in Order
From a longer-term point of view, you will need to organize your spending for your newer, growth-focused startup and get your priorities in order. Expenses like those outlined here will remain important. However, those are related to meeting short-term needs. To meet your long-term needs, you will need to be judicious about where you spend your money and, more importantly, why.
For the best results, try to prioritize expenditures that generate revenue or some type of sizable return on investment in the future. If your startup depends on a particular piece of equipment in order to successfully produce a key product, it stands to reason that: A) buying that equipment and B) paying to maintain it and keep it in proper working order would be top priorities as you literally cannot function without it. The more products you can produce, the more you can sell—and thus the more revenue you can generate.
Carefully review all of your expenses and arrange them in order of importance. For the most part, the things that are necessary to avoid interrupting your business in any way should be at the top of your list.
As you re-order certain budget items, be thoughtful of both the short- and long-term implications of that move. If you prioritize Factor A over Factor B, what chain of events could that cause? If you choose not to focus on computer maintenance and instead move funds elsewhere, what issues would that potentially cause? Are you in a business where slower or more outdated equipment would hurt productivity and your ability to serve your customers? Because if you are, that’s a move you might want to re-think.
Creating the right budget and organizing your spending priorities for your newer startup can feel complicated and time-consuming. This is an example of a situation where “getting it done” is less important than “getting it right”.
If you have any questions about financing your small business, or need assistance with organizing your spending priorities, please contact us. We can help you create a budget that supports your startup as it exists today, and help you prepare for the business it will become tomorrow.