How did you estimate the money required to start your business? Did you imagine a rough figure by pulling it out of thin air like 50,000$ or 100,000$? As funny and stupid as it sounds, most budding entrepreneurs come up with such a figure without any calculations.
I am writing a set of posts that will help you start your business step by step. You are currently on the third step. In the last step, you learned how to raise the money required for the business. In this step, you will learn to prepare a budget for your business. You can start from the first step here.
Why do entrepreneurs not calculate the budget upfront?
Most budding entrepreneurs postpone budget planning until the very last minute. When the time has come to start spending money to set up the business, new entrepreneurs wake up and create a budget in about 30 minutes.
Most new entrepreneurs are talented and sound in the core area of their business. For example, those in software have the programming skills of a whiz. Those planning to open a business in retail, possess the persuasion skills of a charmer.
Though they have sound expertise in their domain, most new entrepreneurs have one thing in common. They hate accounts and numbers. As a result, the new entrepreneur procrastinates the budgeting part as much as possible.
I am a culprit myself. When I started my first business, I prepared our first budget a few months after we were in business. Over the years that followed, I learned the importance of a budget the hard way. We incurred losses and went through failure because I did not bother to create a budget.
I do not want you to repeat the mistakes I committed.
Why should you prepare a rough budget early?
Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”Joe Biden
You might hate numbers and excel sheets. I did too. But approximating your investment, expense, cash inflow and outflow early will help you in the following ways:
- You get an idea of the actual investment necessary. If not, in most cases, you end up with a figure higher than you estimated in your head
- You feel in control and relieved
- Helps you understand the breakdown of expenses by different areas of your business
- You realize what you can and cannot afford and where can you minimize expenses
- Helps you organize and plan
- Keeps you prepared for financial emergencies
- Helps you identify a symptom of a potential problem
- Preparing a budget is like an injection when you have fallen sick. You might hate the prick of the needle, but you will feel much better later.
How to prepare a budget when starting your business?
Now that you know why you should also know how. I am not going to guide you on preparing a complex budget to present to investors. If you are reading this article, I am guessing you already have a phobia towards budgets. I do not want to scare you further. So I will present a simple way to create a budget.
This simple budget will help you get an idea of the total cost involved and how could you go about it.
Let’s go back to Adam and see how he did it.
Who is Adam?
To start off, Adam decided to break the budget into 2 parts.
- The initial investment
- Running expense(Operational cost)
The initial investment:
In this section, Adam decided he will cover every penny spent from the day he started until the day he popped the champagne to cut the ribbon to launch his business. The other expenses incurred after the launch, such as the salary of employees, rent, electricity, supplies would be covered under the Running Expense.
Adam started by opening up a Google sheet.
Here is Adam’s sheet for reference.
As you can see, Adam kept it simple by listing all the expenses he could foresee one after the other. He added a simple pie chart to visualize where the chunk of his money was spent.
Action for you:
I assume you have used Excel or Google Sheets before. I expect no expertise on these tools but I hope you know how to type into a sheet and sum it up.
You can open a new sheet by visiting drive.google.com and using your Gmail ID. On the left, you should find an option to create a new Spreadsheet. You can use my Google Sheet and create a copy. The fields, however, may not work for your business.
List your expenses one by one. You do not have to state the figures down to the dot. Add a figure based on your approximation. If you have no clue whatsoever, list down the item and add no number next to it. But every area where you expect any expense, list it down.
You can sum up the values to get a rough idea of the total. If you spend 2 hours on this, I am almost certain that you will end up with a total which was higher than you expected.
You can use a pie chart to visualize where you spend your money. If you do not know how to create one refer to the link. The process is straightforward and takes only 2 clicks.
Adam’s worries increased when he noticed the actual investment ended up 30% more than he had imagined. On one end he was worried while on the other he was relieved because he now had a reality check. Without the budget, he would have encountered a last moment surprise.
He started looking at various areas to cut down his expenses. He now started thinking strongly about a dark kitchen so that the expenses would remain under check.
Before going down the path of a dark kitchen, Adam wanted to check the revenue he could make by opening a full-fledged restaurant. He decided to make some projections on monthly expenses and revenue.
He opened a second sheet called ‘Running expenses’ and started listing the monthly costs he would incur. He added another sheet called ‘Variables’ so that he could change the numbers easily without having to change multiple fields. For example, he was not sure if he needed 3 waiters or 5, so he created a variable on the Variables sheet.
After spending a good amount of time, he arrived at a figure for his monthly running expense. He was surprised to see a large monthly expense too.
Adam realized that opening a full-fledged restaurant was far more expensive than he had imagined.
Create a monthly expense sheet.
Adam’s monthly expense is present on the second sheet of the spreadsheet – Adam’s budgeting Google Sheet
Though you may not have the know-how to list them all, list what you already are aware of. You can list down most expenses if you spend some time thinking.
A simple way to do it is to imagine a complete day at your business. For example, for a restaurant, it starts with opening the restaurant and cleaning the place up.
So, you need a person responsible for cleaning. Add that to the monthly expense.
Next, you turn on the computer and check the supplies in the refrigerator. You will need a billing software and electricity for the same.
Keep going till you reach the time you close the restaurant. Repeat the activity by thinking again from the start of the day to the end of a business day to identify any expense missed earlier
You will recall most of the expenses you incur. Once you have the figure you will know the money you have to spend in a month whether you have customers or not.
Adam banked on one final hope, the revenue. If the revenue looked promising he could attempt a full-fledged restaurant even if the expense turns out high.
He added another sheet on the same spreadsheet called ‘Running expenses’ – Adam’s budgeting Google Sheet
He started by estimating how many customers can he expect in a day and what was the average bill per person. He added them as variables. He broke it down into dine in and online orders. He segregated them to account for the online fee of 20%. He totaled them all.
Adam now knew where his money stands month by month. He extended his numbers for a long period of time. As per his calculations, he estimated that it takes about 14 months for him to make his investment back or break even.
Follow Adams actions on the sheet – Adam’s budgeting Google Sheet
Estimate the number of customers in a day from various avenues and how much money can you expect. Deduct the expense involved to serve the requests. For example, to serve food at a restaurant you need the ingredients. To sell clothing at a garment store, you need the raw material.
Find how much money will be left over after paying all costs. Keep adding the money left over after all expenses for the month. Deduct the money left over against your initial investment. The figure that you arrive at is what you have spent so far from your pocket(or your investor’s)
For example, if you have estimated a 50,000$ as the initial investment and a profit of 3,000$ in the first month, your overall investment is now at -47,000$.
When the numbers are negative it indicates you are yet to make the money you have put in. You can find how long will you take to recover your money and how much profits can you expect 3 years down the line.
Of course, this is a simplified version without consideration of salary hikes, increase in prices, marketing spends and other factors.
However, it still gives a fair understanding of where you stand. If the approximation shows a 100,000$ you cannot expect it to vary up to 1 million, unless of course, your approximations are like a dart that landed outside the dartboard.
Adam now has a clear idea about what profits can he expect from a full-fledged restaurant. He does similar calculations for a dark kitchen and compares the difference.
Though a difference in profits exists, Adam can now compare figures against other factors such as risk, stability, fear and more. Adam can now make an informed decision.
Similarly, when you have some numbers to back your thoughts and ideas, you feel in control. A lot of risk elements reduce. Some aspects which you assumed as risks do not seem risky anymore. At the same time, some of the aspects you least expected burn a hole in your pocket.
Having a budget in place brings you back to the real picture. Though right-brained people are more driven to emotion, when it comes down to expenses, getting down to the numbers turns out a safer bet.
So, go ahead and plan out your numbers.
I am here to help you with any confusion you have with the spreadsheet. I would love to know how you felt after you prepared a budget. Did you find the number alarming or as expected? Do you feel more relieved after you have planned your budget in some form? Leave a comment or send me an email via the contact form.
Maxim Dsouza has spent over a decade experimenting and finding various time management techniques to improve his productivity. He strongly understands the fact that time is a limited commodity and tries to make every second count. He has extensive experience in leadership in startups, small businesses, and large corporations.
He has helped people of different professions and age groups gain clarity on their goals, improve focus, revise their time management skills and develop an awareness of their psychological cognitive biases.