This article is an abridged version of a presentation I made to The Entourage’s Scalable and Saleable program in June 2013.
No one goes into business to do budgeting. It’s often one of the unglamorous sides of starting a business. And is a budget really essential after all? What if I don’t like looking at the numbers. Will I get something out of a budget?
It all starts with the purpose of a budget. A budget sets out the forecasts of your startup and it can be for a short period or even twelve months or longer. But the really exciting aspect of a budget is that it maps out your strategy into numbers. After all, that’s what drives your business to success.
So why should you budget?
- You need to work out whether your start-up business can be sustainable / profitable
- It helps you keep yourself accountable to the targets you have set
- To help track your operations and the costs you have to meet
When it comes to the strategy of your start-up, you’re creating a story about your business. You need to consider how that story plays out and whether the numbers support and are consistent with your vision.
So when it comes to creating a budget, there are some key factors you need to be aware of:
- What drives your business success. Number of new clients, sales per customers, leads and conversions from your website. The first step when it comes to mapping out your strategy is to work out what the projections for your product sales will be. How do these sales turn into the businesses income?
- Does each product have a cost? If they do, using your projections of sales above allows you to work out your cost to sell these products.
- What is the business’s gross profit? When you take the income of the business and you subtract the product costs, this equals the gross profit. Your gross profit tells you whether you are profitable at a product level. By forecasting your income from sales and the cost of your sales, you can work out whether your product sales will make you any money. This will help you to work out whether you are setting your product at the right price, or whether there are ways of keeping product costs down.
- What expenses are mapped out in your budget? When it comes to mapping out a budget, startups often underestimate what the true costs of their business will be. Are there staffing or rent costs? and when the business is growing, do you have enough resources to meet this growth?
So what are some tips you can take away?
- Make sure that your budget is consistent with your overall strategy and your business story. If not, what needs to change?
- What drives your business to outperform? And how does that feed into your sales?
- Are you realistic about your sales projections, and do you have the necessary resources to achieve them?
- Track how you are performing to budget monthly. This gives you an idea of your performance and keeps you accountable.