Brainstorming Your Business Budget

^{Lesson Materials} Brainstorming Your Business Budget Worksheet
^{Completion time} About 40 minutes

Your business idea is fleshed out and your ducks are almost in a row. But there's one more component to your business plan that is essential to your overall pitch to investors (which you'll learn about in the next section): your business budget.

It's critical to brainstorm your business budget before sitting down with anyone so you can get an idea of what you need to be successful. It's also important for strategically planning future projects and new hires.

Below, we'll inform you on why you need a budget and what to consider when putting one together.

Note: We’ll go more in-depth about the financials involved in starting and running a business in Course Three. For now, we’re giving you a high-level overview to help you get started thinking about budgeting for your business

Components of a Business Budget

Again, a business budget is a key piece of your business plan (which you'll learn about more in the next course). It helps you determine how much money you need from investors and helps you prioritize your objectives.

Components of a business budget you should think about include:

Total startup costs
Day-to-day operational costs (labor and utility expenses included)
Expected income and profit

A good first step would be to decide which expenses are one-time expenses versus ongoing payments.

Estimating Startup Costs

It's tricky to determine how much something like payroll might cost when you're currently the only employee; but it's important to think about if you plan on expanding. That's where research comes into play. Browse around business sites and forums to get a sense of what startup expenses cost. There are also a number of calculating tools like Entrepreneur's Start Cost Calculator that can help you get a price estimate.

Components of a startup cost you should be researching include:

Payroll expenses
Cost of goods
Raw materials
Tax payments

Estimating Day-to-Day Operation Cost

Estimating operational cost should be easier than startup costs. Your first step is to review bills you're already paying; for instance, for utilities and facilities. Take these amounts and tally the expenses for a year of payments. Also, note any transactional patterns from credit card statements.

Be sure to think about the following payments:

Rent / mortgage
Heat, electricity, and water
Phone, internet, and telecommunication software
Insurance, accounting, and legal
Office supplies
Website hosting and maintenance

Estimating your business budget on day-to-day costs will help you reduce risk. For instance, if you've been eyeing a small office space that cost $5,000 a month to rent, you'll quickly realize that by the end of a year, that monthly cost adds up. This could lead you to hold off moving in right away, and consider a more cost-effective work space short-term. Accounting software can help you take note of operational expenses by month in addition to helping you stay organized.

Estimating Income and Profit

Putting together profit and revenue is tricky – but probably the most important part of your business idea. Investors aren't likely to fund your business if you can't provide the monetary value. In addition, estimating profit will help you plan for your business' long term growth.

First, look at your product or service and estimate its price and how much you can sell per day, Things to take into consideration include:

Geographic area
Hours of operation
Competition performance
Seasonality

Once you have an estimated profit for the coming year, compare it with your startup and operating costs using this formula: Profit = Revenue – Cost.

Budgeting Do's and Don'ts

Creating a budget will help you plan the beginning stages, run your business efficiently, and help you eventually grow. To make sure you have a successful brainstorm, keep these do's and don'ts of budgeting in mind:

Don'ts

Don't over exaggerate estimated revenue and profit
Don’t forget taxes, including: sales taxes, state and federal taxes.
Don’t forget seasonality – business could be going great one month and slow the next

Do's

Do your homework; in particular, research your competitors and ask colleagues for advice
Do plan for growth
Do save money for emergencies

Now it's your turn! Download the attached worksheet and jot down your answers to the questions above. Before you know it, you'll have brainstormed and outlined your budget.