Set Up a Startup Budget in 8 Easy Steps

Akash, the owner of a tech startup, is preparing to launch an innovative app. While he is passionate about his project, he faces a common challenge: managing finances. Without a proper budget in place, there is a risk of running out of funds before achieving profitability. Unfortunately, many entrepreneurs overlook careful budget planning and rely on aggressive growth-hacking tactics that leave little room for financial planning and unexpected cash shortfalls. In fact, studies have shown that 61% of startup owners don't have an official budget.

Here is a step-by-step guide to building a successful startup budget to estimate initial costs, keep track of cash flow, and stay lean from the beginning.

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Importance of a budget

Creating a startup budget is your blueprint for using your funds wisely and managing expenses effectively. Whether you're just starting out or already established, having a budget helps you avoid running out of cash too soon and ensures that every dollar is spent smartly. 

Startup budgets play a key role in securing financing, impressing investors, keeping tabs on expenses, hiring the right talent, tracking income, assessing progress, setting future goals, allocating resources strategically, and managing cash flow efficiently.

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8 easy steps to building your startup budget

Collaborate with your team

‍To create an effective budget for your company, it is important to involve input and ownership from various stakeholders. This includes co-founders and department executives who can provide valuable insights on hiring needs, product timelines, and resource requirements. Involving the right people in the budgeting process can ensure your financial plan aligns with the goals and objectives of the entire organisation.

Set SMART goals

‍Make sure your budget follows the SMART criteria - Specific, Measurable, Achievable, Relevant, and Time-bound. This will help ensure that it is reliable and effective. Remember to consider market trends, competition, the size of your business, and any cash constraints when creating your financial projections. Thorough market research is essential to accurately determine revenue and growth targets that will serve as the basis for your budget.

Determine the company's fixed and variable expenses

‍Fixed expenses, also known as overhead costs, remain the same regardless of the number of customers a company has. 

These may include accounting and bookkeeping services, internet and phone services, rent, utilities, technology fees like website maintenance and hosting, credit card processing, business loan payments, equipment lease payments, and payroll and employee benefits packages. Other fixed expenses may include professional fees such as legal or accountant fees, office supplies and cleaning service fees.

Variable expenses include shipping fees (postage, packaging, and insurance), employee sales commissions, and production expenses, including raw supplies, advertising and equipment, transportation, events, and freelance services.

Calculate your monthly revenue

‍Project your earnings for each income source promptly. Take into account variables such as the size of your target market, your potential market share, and the prevailing market conditions. Use your break-even analysis to estimate monthly sales accurately. Be honest about any constraints that may hamper revenue growth.

Explore various revenue and funding options, including product/service sales, loans, savings, and investment income. Cash flow is the total amount of money that flows in and out of a company every month. To create the company's cash flow statement, simply add up all the expenses and total revenue from sales for each month. 

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Also read: How to create monthly financial statements and reports.

Plan for taxes

‍Calculating taxes for a new business can be difficult, but you have to be prepared by researching the tax laws of the state or country and the specific industry. Consult with financial advisors like Inkle Tax to gain insights and best practices for tax planning. We also help anticipate any unforeseen situations that could impact your tax plan for maximum accuracy.

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Related reading:  Form 1120.

Forecast your projected revenue

‍Now that you've a solid grasp of your income and expenses, it's time to forecast the business's future revenue based on its historical performance. Start by determining the current revenue generated by the business. Next, analyse data from the last 3-6 months to gauge growth trends.

Calculating the average growth rate, you can make projections for the upcoming 3 months. Projected income serves as a compass to anticipate the growth path that your startup is likely to follow in the coming days.

Review and assess

‍Regularly review your budget and assess if you have allocated enough resources to support business growth. Analyse key metrics such as acquisition costs, lifetime value, and retention to ensure that your economics align with future profitability goals. It is also important to consider whether your budget allows sufficient runway to reach critical milestones.

Expect the unexpected

‍Many businesses wisely set aside a safety net for unforeseen costs that may arise. Fluctuations in regulations, the economy, or taxes can shake up a company's finances, but having an emergency fund in place can provide a buffer against these uncertainties. To prepare for unexpected expenses, it's beneficial to identify any one-off costs to gauge your potential spending. Seek advice from a financial expert to figure out the best emergency fund strategy tailored to your business's unique needs and scale.

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Wrapping up

A startup budget is an essential tool for any early-stage business. With the ability to adapt to changes and anticipate cash flow issues, it serves as the first line of defence. Take your time to create a well-defined budget to control your finances, improve decision-making, and boost investor confidence. With a well-structured budget in place from the beginning, you set yourself up for success.

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