Prepare start-up budgets

Why prepare budgets?

The budgets provide an overview of the planned financial development of your business and can provide an overview of how much the start-up phase will cost. Important questions you should be able to answer are: What will the start-up phase cost and how do you intend to finance it? Do you have enough money to pay the bills you will receive? Will the business be able to survive in the long term? A good and realistic budget will give you answers to many of your questions.

The budgets will also show whether you will have enough money in your account to pay your bills and help you assess your profitability. Together with the the accounts, budgets are key governing documents for your business.

Budgeting for entrepreneurs and founders

The budgets, along with a businessplan (plan which sets out how you intend to run your business), provide important background information for the decisions that you will need to make. Before starting your business you should prepare three main budgets:

• Start-up budget: Shows how much money you are likely to have to spend in order to set up your business (capital requirements).
• Operating budget: Shows the profitability of the business operation.
• Liquidity budget: Shows the ability of the business to meet its ongoing financial obligations.

How much will the start-up phase cost?

Your expenses will often exceed your revenues during the start-up period, and it will often take longer than expected to make the first sale. You may have to allocate money in the start-up budget to cover your living expenses during the early days. A useful tip is to draw up a list of what you will need, when you will need to purchase it, how much it will cost, and how to finance it.

Start-up budget (capital requirements)

The start-up budget shows a list of what you will need in order to get started and what it will cost. It is important to include all one-off costs linked to the startup and make sure you have sufficient funding for both the start-up phase and the initial operating period.  

Common items in start-up budgets

The items you should include in your start-up budget will vary depending on the nature of your business. A general rule of thumb is to include costs that must be in place before you can start trading. What you will need can vary from industry to industry. You can find out a lot about typical start-up costs by talking to someone who has experience in the industry your business will be entering or a mentor.

Some examples of frequently used items in start-up budgets are:

• Premises: Purchase, refurbishment, rent through to start-up.
• Machinery and equipment: Purchase of essential machinery and equipment.
• Means of transport: Purchase of vehicle.
• Office equipment: Essential equipment, telephone, PC.
• Stock.
• Production equipment: Essential in order to produce anything.
• Tools: Essential in order to carry out assignments.
• Initial marketing: Logo, domain, website, etc.
• Training courses: Essential for start-ups.

Operating budget (result budget)

The operating budget gives an indication of the profit/loss you can expect. Start the budgeting process by preparing realistic calculations. This will make the budgeting process easier. When you start budgeting, you must have at least an idea of what you will sell and at what price, what the goods will cost to purchase, who your customers are and what expenses you will incur in order to sell the goods or services.

You should also try to set up a budget month by month, so that you have a good idea as to how your business will develop. When you compare your budget with your actual accounts, you will soon see whether you are heading in the right direction. If it becomes apparent that you are selling less than you expected, you will be able to realise this and take appropriate action much sooner than you would otherwise have done.

Without any historical figures, it can be difficult to draw up a budget for the early operating years. During the start-up phase, it is important that you carefully think through the expenses that you will incur during your first operating year. The budgeting process will become easier once you have been running your business for a while and have historical figures available. One tip is to set up as realistic a budget as possible and to break down the figures per month. This will give you a guide for the early period of your business. It can be a good idea to overestimate your expenses and underestimate your revenues. If you find the budgeting process difficult, an adviser or accountant will be able to help you.

Liquidity budget

When creating a liquidity budget, based on your operating budget, it will show you whether you are going to have enough money in your account to pay your ongoing expenses on time. If your expenses exceed your revenues during certain periods, you will be able to plan how you can stay afloat during these periods. It might, for example, be appropriate to take out an overdraft loan so that you can pay your bills on time. For new businesses, this is often one of the most important budgets to use in the management process, as most businesses have limited funds available during their early years.