Starting Smart

This story appears in the September 1996 issue of Startups. Subscribe »

Running a profitable new business requires adequate cash flow and that operating expenses consistently be met. Once you've settled on a business idea and have completed adequate preliminary research, the time has come to develop your first estimated annual budget.

Even the most conscientious person who tries to budget for an entire year may underestimate or overlook a variety of everyday expenses. Budgeting problems can result from miscalculations, overspending, or, quite simply, growing too fast. Before jumping in, keep in mind that the budget for your first year must include both one-time start-up costs and ongoing monthly expenses.

Whatever your situation, a good budgeting rule of thumb is to err on the side of caution. This means it's usually best to overestimate your expenses-and the time it will take until your business can cover its own costs-and underestimate potential profits. Be sure to incorporate advice from others who are running businesses similar to your own. Better safe than sorry.

To plan a realistic budget, many business counselors suggest calculating both best-case and worst-case financial estimates, then settling on numbers that fall somewhere in between. Others feel that a visit to an accountant can prove invaluable in helping to project your business' expenses, revenues and cash flow. There's no single, foolproof method. As a result, our entrepreneurs, who are already operating successful ventures, have returned to share the procedures they followed and the lessons they've learned about planning an accurate budget.

Judy Proudfoot, Proudfoot Wearable Art

Judy Proudfoot, 45, designs and sells handpainted clothing items, including sweatshirts, T-shirts and coordinates. Working out of her Alexandria, Minnesota, home, she uses a unique watercolor method with acrylic paints to create wearable works of art.

Because Proudfoot became involved with the Foundation for International Community Assistance (FINCA) before launching her business, she says planning her first budget was a snap. Based in Washington, DC (202-682-1510), with regional offices nationwide, the foundation provides start-up capital, instructional training and ongoing support to individuals-many of them women-interested in launching small businesses.

"The folks at FINCA showed me what it takes to start a business," Proudfoot says. "When I started with the group, they actually gave us a budgeting sheet that was all charted out, category by category, guiding us through the process of determining how much money we would need monthly in order to run a business. As a result, I have a solid system that I go by, and I take it very seriously. Although I'm now into the second full year of my business, I still look back at my budget every month and compare where I thought I was going to be financially versus what really happened. It helps me to remain realistic about my goals and expectations."

Because she works from home and her products are relatively inexpensive to create, Proudfoot says that her business's budget is quite different from many others. "My business is a lot simpler than most," she explains. "As a result, what I mainly have to budget are my craft-show fees-I have to pay out a certain amount of money to reserve selling space at upcoming shows, and payment is usually required about four months in advance. That's my biggest expense right there, followed by expenses to pay for the clothing items themselves, the paints, gasoline, telephone calls, postage and shipping. Those are the real basics for me. That's where the money goes. And it doesn't hurt, either, that my husband works in advertising, because I get a lot of freebies from him, including no-charge consultation about how to get the most for my advertising dollar."

Marian Fletcher, Let's Go Party

Marian Fletcher, 55, says that despite all the time she spent planning the initial budget for the party-planning and catering service she launched from her home, she still somehow overlooked some major expenses.

"The budget I prepared has been working pretty well, but I ran into a couple of problems because I forgot to add in certain things," Fletcher explains. "Like taxes. I knew I was going to have to pay taxes on whatever profits I made, but I didn't even think about the sales and use taxes that I must pay on whatever I buy or sell. Having expanded my business to include one full-time employee and six part-timers, I didn't even think about having to pay money out for the employee's taxes. There are so many different kinds of taxes, and those little things really mean a lot. They add up very quickly and can offset even the best-laid plans."

Unlike most small-business owners who budget 12 months at a time, Fletcher prefers to plan her budgets six months at a time, due to the cyclical nature of the party-planning and catering profession. "With this type of business, it's more precise to budget six months at a time, rather than annually, because you book most of your jobs well ahead of time, and demand for your services comes in cycles, depending on the time of year," she says. "Although weddings and other big affairs, such as anniversary parties, tend to book one year in advance, most other parties only book ahead three to six months. By planning a budget six months at a time, you get a much clearer picture of how much money you're going to make, and what your expenses will be."

When it came time to prepare her first budget, Fletcher was a student at Women Entrepreneurs of Baltimore City (WEB), a local entrepreneurial education program. Her instructors there provided guidance in budgeting realistically. "They gave us a form to go by," she says, "which included such items as: rent; insurance; costs of goods sold; transportation, storage and postage expenses; post office box rental; and different things like that. It was a very long sheet. The funny thing is that it also contained a special place for taxes-if only I'd known at the time everything that was involved! Except for overlooking those taxes, though, the budget has really worked."

Vic & Suzette Brounsuzian, Meg-A-Nut Inc.

Once Vic Brounsuzian, 44, decided, with his wife, Suzette, to open a small shop selling dry-roasted walnuts, pecans, pistachios, filberts and other items, he gathered extensive budgeting information about pricing and expenses from companies nationwide.

"I started doing price comparisons and calling vendors right away," Vic says. "I practically called everywhere in the United States. I needed to bring in nut supplies, equipment, balloon decorations and other food items like fine chocolates and dried fruits and snacks-there were a number of things being done simultaneously. I had catalogs and brochures from all of these companies sent over to me, so I could look into their products and price lists. Next, I narrowed my selection of vendors to the three major distributors of each type of product I was interested in, and generated some estimates from there."

Because the Brounsuzians were setting up shop in a local plaza rather than working from their home, they were forced to include some rather substantial one-time start-up costs in their first-year budget, in addition to expected monthly expenses. These included outlays for extensive renovations, fixtures, furniture and equipment.

"We chose a space half a block away from a movie theater and were thrilled with it, but there was a lot of work that needed to be done," Vic explains. "Working with contractors, I had to do basically all of the interior construction in the shop because this was a brand-new shopping plaza, just being completed. Then there were other big expenses involved, like purchasing a roaster for the nuts and dealing with the sign companies. But you know, as they say, you work hard and it pays off."

A business writer for the past seven years, Kylo-Patrick Hart has run a successful homebased consulting business since 1989.

Just For You

Planning a realistic budget involves estimating both one-time start-up costs and ongoing monthly expenses. One-time costs typically include money spent on equipment, furniture and professional fees incurred in organizing the business. Ongoing monthly expenses include funds spent on rent, insurance, employee wages, accounting and legal fees, and advertising and marketing expenditures.

When preparing the first annual budget for your new business, the following one-time start-up costs should be included, as applicable: renovations and remodeling; equipment, fixtures and furniture; starting inventory and supplies; deposits, licenses and permits; legal, professional and consulting fees; utility installation; and initial advertising costs.

The following monthly expenses should also be included, as applicable: salaries and wages; rent expenses; insurance, utilities and tax payments; materials and supplies; freight and shipping expenses; advertising and marketing fees; telephone and fax charges; credit card, loan and interest payments; cleaning and maintenance costs; accounting and legal fees; automobile and transportation expenses; and unexpected miscellaneous.

Contact Sources

Let's Go Party L.L.C., 4531 Manorview Rd., Baltimore, MD 21229, (410) 624-0584.

Meg-A-Nut Inc., 1574 Buttitta Dr., Streamwood, IL 60107 (708) 837-2551.

Proudfoot Wearable Art, 1402 Bridgeport Ln., Alexandria, MN 56308, (612) 763-4904.