Having some trouble creating your venture’s first budget?
Read on to learn more about the importance of being intentional about your budget!
Q: Why do I even need a budget to begin with?
A: Consider these three reasons that most entrepreneurs have for creating and maintaining a budget:
- To understand and achieve important financial targets for your business, like your breakeven point (the point where your earnings have covered the investment you made to start your business), and hitting profit milestones that could trigger a new hire, a new piece of equipment, or even a move to a “brick and mortar” location.
- To understand when your business will need outside capital–such as a loan, investment, or grant–and how much capital you’ll need. Speaking of capital, these banks, investors, and grantors will need to see your budget and understand your financial plans for their funding.
- To manage funder relationships once they invest or loan you capital. Your capital sources don’t just want to see your budget before they invest, they’ll expect monthly, quarterly, or annual updates from you to understand the trajectory of your business growth. It’s important to keep these relationships in good standing so you can ask for follow-on capital as you need to to continue to grow.
Q: What are a couple of things to keep in mind as you’re predicting these future numbers to put into your budget?
A: Here are some considerations for entrepreneurs making their budget:
- The number of sales they need to make in the next six months and the average value (revenue) of those sales
- The total cost of producing each product or service unit (i.e. raw goods, labor, manufacturing, implementation, maintenance)
- Overhead expenses that their business will incur, regardless of how many units it sells (i.e. utilities, insurance, payroll and benefits, loan payments, legal fees)
- The amount of revenue required for the business to reach the breakeven point
- Your sales strategy for closing those sales, and any related marketing and sales cost (i.e. sales team, attending trade shows, advertising, free samples)
- At what point will you need to make additional hires, move locations, or invest in infrastructure (i.e. at a certain client load, units sold per day/week, season, or other factor)?
Q: What are some important estimates and assumptions to make when forecasting?
A: Here are some ideas for getting started with assumptions and estimates:
- Define your target customer and their characteristics
- Research your market and estimate how many target customers you could expect to service, based on the number of people who meet your customer profile and your business’s capacity to serve them.
- Make assumptions about the specific profile(s) of customers who will be your heaviest users and/or the soonest to purchase (early adopters).
- Make assumptions about the average purchase amount, frequency, and product or service mix per customer. For example, if you are a childcare service, how many hours of childcare do you expect one family (customer) will purchase per week, at what hourly rate? Will this amount be consistent week over week or fluctuate, and if so, how?
- Thinking about your target customer’s lifestyle, current purchasing behaviors, and motivations for buying from you, how might you reach them through marketing and sales efforts, and what will these expenses entail?
Q: What are some common founder financial mistakes?
The first mistake I see is when entrepreneurs “set it and forget it.” This happens when you attempt to set a budget today for the next two or three years and don’t check in periodically to make adjustments to your assumptions and compare your “actuals” (the revenue you really gained and the expenses you really incurred during a specific time period) to your estimates. While you don’t necessarily want to be changing your annual budget regularly, you do want to be reviewing it for changes.
Another common mistake is when entrepreneurs avoid the responsibility of setting and tracking their business budget themselves and attempt to outsource these activities to an accountant or another team member, usually because they feel uncomfortable and unfamiliar with the “numbers” of the business. Keeping your hands on your business finances is like keeping your hands on the steering wheel: without it, you don’t have a good sense of where your company is heading and are likely to end up far from your goal. Our advice at SEED SPOT is to find an entrepreneurship program like the Impact Accelerator or a business mentor who can empower you to feel confident in your financial leadership!
To hear more advice from Cheryl, check out the recording of her webinar here. If you’d like to explore ways that SEED SPOT can help you with your budgeting and business leadership, schedule a 15-minute call with a team member today – we’re eager to help!