Budgeting for Startups
Budgets are crucial to the management and success of any startup. But before you begin creating one for your company, it is important to know what a budget actually entails and why they are essential for startups.
What Is a Startup Budget?
A startup budget outlines the expected costs a new business will incur as it launches and begins operations and is an integral part of your startup’s business plan. This budget typically includes things like equipment purchases, office space rentals, employee salaries, advertising costs, and any other expenses needed to get the business up and running.
Having a well-planned startup budget is crucial for new entrepreneurs to understand the capital required to launch their venture and operate until revenue begins coming in.
Why Do I Need a Startup Budget?
A well-developed budget is essential for any new startup. With limited capital and resources, startups need to carefully plan their spending to avoid running out of money before generating revenue. Here are the top reasons why your startup needs a budget:
Helps to Make Better Decisions
Overall, a thoughtful budget gives founders the visibility they need to make smart spending decisions in the early stages of their business when financial discipline is critical.
Helps With Fund Allocation
Without a clear budget, startups risk wasting money on non-essential costs or underestimating their capital needs. A budget helps startups allocate funds across all the necessary startup costs like product development, marketing, hiring, operations, and legal fees.
Helps With Expense Tracking
Finally, a startup budget allows companies to track expenses over time to identify areas where they may be overspending and make adjustments for the betterment of their business.
How to Create a Budget for Your Startup in 5 Steps
Having a detailed budget provides startups with a financial roadmap as they work towards profitability. However, if you’ve never created a budget for your business before, it can be tough to know where to start. Here’s how to create a startup budget in five easy steps:
1. Gather Your Tools
To start, make sure you have any tools necessary to create your budget.
This may include spreadsheet software such as Google Sheets or Microsoft Excel, accounting software, quotes from any vendors or contractors, and any additional documentation you may need to get a full understanding of your startup’s expenses or projected revenue.
2. List Startup Costs
If you’re just starting out, you need to factor in the costs related to starting your startup. Otherwise, you can skip this step.
Your initial startup costs may vary depending on the type of startup you’re launching, but a few common ones include materials and supplies such as initial software costs, service deposits, initial inventory, and upfront insurance costs.
Recommended: Estimate your expenses with our Startup Costs Calculator.
3. Determine Fixed and Variable Costs
Next, you need to determine the fixed and variable costs associated with your startup.
Fixed costs are expenses that don’t change and aren’t impacted by sales. These typically include rent and utilities, phone costs, website maintenance and hosting, employee salaries and expenses, and any other continuous fees or payments.
Variable costs, unlike fixed costs, are subject to fluctuations and change. These commonly include inventory, marketing, sales commissions, and any other expenses that may shift due to sales or revenue.
4. Estimate Monthly Revenue
If you’re just starting your startup, you likely don’t have any sales or revenue to report. However, you will still need to project an estimated monthly revenue to create an accurate budget, here’s what you should consider when doing so:
- Research Against Competitors – Research the average sales for competitors in your industry, geographic market, and of similar size to model potential revenue.
- Assess Trends – Identify seasonality trends that may impact sales at different times of year. This can help project sales fluctuations month-to-month.
- Factor in Growth – Factor in how sales may steadily ramp up month-over-month as you gain customers. Don't assume full-capacity sales immediately.
- Use What You Know – Use any pre-orders, letters of intent, or interest from potential customers to directly infer possible sales.
5. Find the Total and Assess
Once you have all of the information necessary to get a holistic overview of your startup’s expenses, fixed and variable costs, as well as projected monthly revenue, your next step is to find your total. Do this by subtracting your expenses from the sum of your monthly expected sales.
Be sure to factor in any money you or an investor have invested into the business.
Then, you can utilize your budget to determine how much you should be spending, where you should cut costs, and make preparations for the future while you work towards generating revenue.
Best Budgeting Tools for Startups
The right tools make modeling a startup's financial needs easier and more accurate. Plus, many startup accounting software tools offer more than just budgeting help, giving you a comprehensive financial wellness asset. Here are a few great startup accounting tools to consider:
QuickBooks is a comprehensive financial management software that offers all the features needed to meet your startup’s accounting needs. With all of your business’s financial data in one place, you can easily create a thoughtful budget using the platform’s budgeting tools.
With the Zoho line of products, you have access to a variety of financial management tools, from bookkeeping to accounting. Using Zoho Expense, you can create multiple budgets and even restrict staff spending to ensure you control expenses.
Xero is an accounting software for small businesses. With their Budget Manager included in their software packages, users can create one comprehensive budget to manage their business’s spending with ease.
Frequently Asked Questions
How do I make a budget for a startup?
To create a startup budget, you need to calculate startup costs as well as fixed and variable expenses and subtract it from projected sales or revenue.
What is the average budget for a startup?
There is no one-size-fits-all average budget for startups since costs can vary significantly depending on the industry, location, founders' salaries, type of product/service, and other factors.
How do I create a startup budget template?
To create a startup budget template, you’ll need to use spreadsheet software such as Microsoft Excel or Google Sheets. Structure the template into columns for startup costs and recurring expenses, as well as fields for revenue projections. Add a row for each month of the year.
Finally, apply formulas to calculate totals, percentages, and any other metrics that will help you leverage the information in the most efficient way.