For many startup business owners, there are so many financial fires to put out in a given week that it's hard to find the time to do any short- or long-term financial planning. But by failing to plan financially, you may be unknowingly planning to fail.
Business budgeting is one of the most powerful financial tools available to you. Put simply, maintaining a good short- and long-term financial plan lets you control your cash flow instead of having it control you.
The most effective financial budget includes both a short-term month-to-month plan for at least a calendar year and a long-term plan that covers a period of at least three years (some go up to five years) by quarter.
While some owners prefer to leave the one-year budget unchanged, others adjust it during the year based on certain financial occurrences, such as an unplanned equipment purchase or a larger than expected upward sales trend. Using the budget as an ongoing planning tool is recommended. However, here's a word to the wise: Financial budgeting is vital, but don't get so caught up in the budget process that you forget to keep doing business.
In the startup phase, you'll have to make reasonable assumptions about your business to establish your budget. Here are some questions you'll need to ask:
- How much can be sold in year one?
- How will the products and/or services you are selling be priced?
- How much will it cost to produce your product? How much inventory will you need?
- What will your operating expenses be?
- How many employees will you need? How much will you pay them? How much will you pay yourself? What benefits will you offer? What will your payroll and unemployment taxes be?
- What will the income tax rate be? Will your business be an S corporation or a C corporation?
- What will your facilities needs be? How much will it cost you in rent or debt service for these facilities?
- What equipment will be needed to start the business? How much will it cost? Will there be additional equipment needs in subsequent years?
- What payment terms will you offer customers if you sell on credit? What payment terms will your suppliers give you?
- How much will you need to borrow?
- What will the collateral be? What will the interest rate be?