Here are some tips to help you budget for your new business so you can start things off on the right foot:
1. Identify your business type.
The type of business you plan to start will have a big impact on your start-up costs. For example, opening a physical store will likely be more expensive than launching an online shop. Some businesses will need a company vehicle or specialized equipment, and some will need employees. Do some research into the type of business you’re planning to open so you can identify exactly what costs will be involved.
2. List out all potential expenses.
Next, make a list of all the expenses you foresee for your business, separating them by one-time and recurring costs. Examples of one-time costs might include things like equipment, website development, and business licenses. Recurring costs could include things like rent, internet, insurance, and payroll. In most cases, you’ll also want to earmark marketing as a recurring expense. Many aspiring business owners forget to think about marketing during the start-up phase, but you should consider what marketing efforts will be needed to bring awareness and customers to your business. Failing to account for your marketing needs could spell disaster for your business.
3. Research and assign dollar amounts.
Once you’ve listed your anticipated expenses, you should research how much each will likely cost. Start by searching online to get a general idea of average prices for the items or services you’ll need. You can also reach out directly to suppliers or service providers to request quotes. Another great way to gather realistic estimates is by talking to other business owners in your industry. The more research you do, the more accurate your budget will be.
4. Leave room for surprises.
Even the best plans can run into problems. Prices might go up, equipment could break, or you may need to pay for something you didn’t expect. That’s why it’s smart to add a little wiggle room to your budget. A good rule of thumb is to add 10% to 20% to your total start-up costs. This buffer can help you stay on track financially, even if the unexpected happens while you’re building out your business.
5. Finalize and analyze your start-up budget.
Add up all of your anticipated expenses and compare them to the amount of money you’ve already saved up for your business. This will help you determine if you have ample resources to move forward, or if you’ll need to focus on funding.
6. Calculate your breakeven point.
The breakeven point for your business refers to when its total revenues match all of its costs. When you reach the breakeven point, you’re no longer losing money, but you’re not profitable yet either. Calculating your breakeven point is like running a financial reality check for your business. It helps you set realistic sales goals, can guide your pricing decisions, and allows you to budget more effectively and accurately. Calculating your breakeven point before launching a business can also help you identify if the business is too risky to proceed with. If your business can’t realistically support or generate the sales volume needed to break even, it’s time to reevaluate the idea.
In its simplest form, your breakeven calculation will look something like this:
Fixed Costs ÷ (Selling Price – Variable Cost Per Unit)
For example, if you sell a product for $50 and it costs you $30 to make each product, and your fixed costs are $1,000 each month, you would need to sell 50 products in order to break even: $1,000 ÷ ($50 - $30). While this simplified calculation might not be helpful for complex business models, the U.S. Small Business Administration has a helpful guide you can use to help calculate your breakeven point: https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs/break-even-point/calculate.
7. Plan your funding strategy, if necessary.
It’s important to be realistic when it comes to funding a business. Most banks aren’t going to lend money to a business that has no proven revenue stream, but other options do exist. They might include:
- Savings: You could consider tapping into your personal savings to fund your business, or you could hold off on launching your business until you’ve had a chance to save the necessary funds.
- Personal Loans: If you have good personal credit, you might be able to qualify for a personal loan to help get your business off the ground.
- Business Credit Cards: Generally, business credit cards are easier to qualify for than business loans, so they could be a good option for things like equipment purchases, inventory, and business licensing. Responsibly using a business credit card can also be a good way to build a credit history for your business. Just be aware that business credit cards typically have high interest rates and can be difficult to pay off if you don’t use them smartly.
- Grants: Some government agencies, non-profits, and private organizations offer business grants that don’t need to be repaid. These are often awarded to businesses who can demonstrate an ability to tackle specific issues like innovation, job creation, or community development.
- Investors: You could try seeking funding from friends, family, or outside investors who believe in your business idea. They might be willing to provide financial support in exchange for a share of profits, or repayment with interest. Just be sure to treat it like a formal business arrangement. Use a written agreement and set clear expectations to avoid emotional pitfalls.
- Crowdfunding: Platforms like Kickstarter and Indiegogo can help entrepreneurs raise money online by pitching their business idea to a wide audience. Depending on the crowdfunding platform, supporters may contribute funds in exchange for rewards, early product access, equity, or even interest-bearing returns. Crowdfunding can offer a flexible way to secure the financial resources needed to launch a business.