How to Plan a Budget for Your First Business

It’s exciting to consider and polish your first business idea, since it gives you a sense of creation, innovation, and leadership. But unfortunately, a good business idea and passion to back it up simply aren’t enough to succeed in the entrepreneurial world. If you want to be successful, you must pay close attention to the logistics of the business, carefully planning and adhering to a set budget. But with minimal entrepreneurial experience and limited financial knowledge, how can you create a budget that works?

This guide will teach you the basics.

Project Your Income

First, you’ll want to project the amount of revenue your business is going to generate. While it’s important to make forecasts for up to several years in the future, your most important focal point is the near future—the first few years of operations. Potential income sources will vary depending on the nature of your business, but could include things like hourly rates, product sales, loans, and investment income. Look to examples of businesses like yours as a good starting point, and do additional research to improve your accuracy.

Establish Your Fixed Costs

Next, draft a list of your fixed business costs; these are costs that will remain consistent over time. They’re often charged to your business once a month, and don’t vary much. The best example of a fixed cost is your rent (or mortgage cost); you’ll pay this every month, and with a good lease, it’s not going to change. You can easily build it into your budget model. Also include utilities like electricity, internet services, the salaries of your employees, bank fees, and peripheral services you need to make the business operational.

Establish Your Variable Expenses

Variable expenses are a bit more difficult to project, but it’s still important to account for them in your budget. These are costs that will fluctuate in response to supply and demand, consumer interest, and your stage of growth. For example, the cost of raw materials, hourly wages for independent contractors, commissions for your sales team, marketing and advertising costs, and travel costs will likely change from month to month. You’ll also need to consider periodic expenses, like inspection activities, that will recur, but may vary in timing and cost. Try to project a total amount in this category that gives you some flexibility.

Forecast and Tally Your One-Time Investments

While researching your business, you should be able to come up with a list of all the one-time purchases you’ll need to get your business started. For example, you’ll need to buy computers and other pieces of equipment that will enable you to create products or provide services. Office supplies, software, and office furniture are further examples of things you’ll need to consider. Software is an especially important and valuable investment for any business. For example, using event rental software like Rentopian can make your rental business much easier to manage.

Interview and Ask for Input

At this point, you should have a loose, work-in-progress budget for your business. You’ll have an idea of how much revenue you’ll be receiving on a monthly basis, how much you’ll need to spend initially, and what you’ll be paying to keep the business running. At this point, it’s a good idea to talk to other professionals and reset your expectations.

As a new entrepreneur, there will likely be some categories you’re missing and some expenses you’re inaccurately estimating. The best way to find these is to talk to people who have been in this position previously. If you have any seasoned business partners, talk to them. If you have a mentor, ask them what they think—and if you don’t have a mentor, consider starting to look for one.

This doesn’t mean you have to make changes based on whatever these people instruct; instead, take their advice in stride. Look for estimates you can improve, or expenses you’ve missed, and make corrections as you see fit.

Build in a Buffer

Even personal budgets can benefit from having a built-in buffer—a degree of flexibility that affords you protection from unanticipated expenses and events. Try to estimate your revenue a bit lower than you think it’s going to be, and build in extra expenses to your budget, in case something you hadn’t expected comes up. This way, you’ll be able to weather significant changes to your environment without jeopardizing your entire financial plan.

Chances are, your first draft of a budget is going to be sketchy. Your projections won’t be accurate, your profit margins may not be reasonable or acceptable, and you’ll forget about multiple entire categories of expenses. Fortunately, this doesn’t have to be perfect. You can carefully adjust your budget (and your business approach) over time as you get more information and learn more about your industry; remain adaptable, and there’s nothing that can stop you from eventually succeeding.