“Let’s just wing it and start our business without planning a budget.”
–Said no successful businessman or woman ever
Suppose you have an extra few hundred grand to play with and you want to buy a business. And let’s say that the business you decide to buy is based upon your binge-watching AMC’s hit series, Breaking Bad. If you’re familiar with the show, you know the business in question is a car wash.
What would be so bad about buying a car wash without first establishing an operating budget? For starters, you probably don’t have a steady, cash-heavy side income such as Breaking Bad’s main character, Walter White.
And if you don’t know how much things cost (or estimate the cost), you’ll likely run out of money very quickly. Let’s run with the car-wash example.
The may be building costs; real estate acquisition costs; employee uniforms; equipment; signage and other advertising, etc….
It’s easy to see how a couple hundred thousand dollars can go very quickly when starting a new business.
For this reason, it’s important to set a budget and frequently (at least once a month) refer to it to make sure you are staying within your means.
Before you jot down the first item on your budget, take several hours to research the industry you want to dive into. There are likely articles online you can reference for your industry that will provide a guideline of how much you’ll need to get started. (For example, here’s one for the car wash business.)
In addition, you should talk to as many business owners as you can that have a similar business. Some owners may not have the time to talk to you. However, perhaps a general manager will know enough about the business to give you some guidelines.
Unless your idea for a new business is so novel that there is literally no other competition, you should take the time to visit other successful businesses that are already doing what you want to do. (If your idea for a new business doesn’t involve a brick and mortar store, are there other websites that have lots of traffic you can successfully emulate?)
Components of a Budget
Now that you have a general idea of how much things will cost, it’s time to prepare a budget. Your budget should include 4 major components:
- Revenues (total profit without factoring expenses)
- Profit (Sales minus expenses)
- Additional expenses/improvements (if there is money left over)
You should have a budget prepared at least yearly. Some people may find that preparing-and revising-a budget quarterly will be better for staying within budget.
One important thing to record in your budget is expected revenues. You don’t have to figure out expected quarterly earnings as if you’re a publicly-traded company. However, you should have a rough idea of how much you’ll expect to earn in the next year. If you’re just starting out, you might not have a clue the amount of revenue you’ll earn. That’s why it helps to talk to at least one business owner in your industry to get a realistic baseline revenue expectation.
A – B = C
Now that you have a rough idea of what revenue your business will earn, it’s time to factor in costs….
Keep in mind some of theses costs might be fixed while others might be variable.
For example, if you are signing a one-year lease for an office at $2,000 month, you know that $24,000 will be a fixed rent cost for the year. An example of a variable cost is social media advertising (if you’re planning on trying social media advertising). If you have a business that’s seasonal, you may want to invest more money on social media advertising for holidays. Factor this in to your annual budget.
Consider every expense/cost in your budget. If you’re not sure exactly how much a certain cost will be, such as social media advertising, come up with a conservative estimate based on the available research at your disposal.
Now that you have all your estimated costs factored into your budget (use simple accounting software such as Quickbooks), it’s time to do some simple math:
“SALES minus (-) COST = PROFIT.”
Is the profit robust enough to make owning and running this business worthwhile? If so, congratulations. If you work hard and stick to your budget, you’ll likely have a successful business. But if you experience sticker shock upon looking at total estimated profit, you may have to reconsider getting into business in the first place. Or, determine if there are any key costs you can eliminate or spend less on. For example, can you slash office rent in half by getting a smaller office or finding one in a lower-cost area?
Don’t Forget to Budget For POS
Whether you plan on opening a boutique, coffee shop or restaurant, having a best-in-class point of sale (POS) system will help your business run smoothly and efficiently. A modern point of sale system will help you track inventory, analyze sales, track employee hours, manage email marketing and much more….
Contact us today for a point of sale demonstration. And good luck on your new business.