write a budget

Writing a budget can seem like a bad high school project to most people but it is actually a very important step for anyone looking to start a small business.

main reasons why you should do a budget before starting a business:

1. To assess how much money you will need to borrow or save in order to start the business and sustain youself and your family during the slow start-up phase.

2. To plan for known expenditures and estimate unknown expenditures like: income and business taxes, house and car repairs, health expenses or business interruptions.

3. To determine whether or not the new business can provide the amount of income you need to support your desired lifestyle. If it will not provide for our needs - it is important to know it and plan for it ahead of time.

common errors in budget writing:

1. Ignoring personal costs: often small business owners do not have other sources of cash and most rely on funds from their business to fund their medical costs, housing and vehicle expenses, vacation and other expenditures. If these amounts are not taken into account in your budget then you risk running into unexpected cash shortages. While it is good to separate personal and business amounts within the budget - it is equally important to make sure that both are accounted for.

2. Bad assumptions: it is human nature to be optimistic about a new venture - unfortunately this leads to a tendency to over-estimate revenues and under-estimate expenses when budgeting. It is very important that you are realistic about when you can expect to start earning money, how much you can expect to make, the growth rate you should expect in your revenue and the actual start-up and supporting costs you should expect to incur.

3. Budgeting for too short a period: a six-month budget is great but may be misleading as it may not include all seasonal shifts and annual costs. In order to get a true picture of the expected cash flow it is essential that you budget for at least a year. Ideally small businesses should try to budget for the next two to three years.

4. Ignoring cost of living increases: it is easy to assume that costs will remain the same over time but the truth is that costs will naturally increase over time (just look at gas!!). Therefore it is important to build an estimate for inflation and other cost increases into your budget.

5. Not building in a buffer: a good budget contains provisions for potential costs which can not be estimated such as health care, home repairs, etc... - a great budget contains these amounts plus a blanket provision for other, unforeseeable occurances. Depending on your business this may be as low as 1% or as high as 10% of your other budgeted expenses. This amount is to cover for things that not only can not be calculated but also can not be foreseen. NOTE: this is a great idea for your business budget to help you make sure you have a cash reserve but if you are pursuing financing then you need to be careful about building too many provisions into your budget - talk to the financial institution about what they would like to see.

6. Write it and forget it: many a great budget has been written up then put into a drawer and forgotten, thus a valuable tool is lost. The best thing you can do with a budget is revisit and update it periodically (weekly, monthly or even quarterly depending on your business and cash flow levels).

what should you do when making a budget:

1. Start with your balances in bank accounts, investments and debts.

2. Budget for three years using your current cash inflows and outflows.

3. Adjust for the changes you plan to make (ie. remove salary from your job and add estimated income from the business). NOTE: it is often beneficial to show cash provided by and used in the business separately within the same budget as personal amounts. This way you are taking both into account in the bottom line - however you can tell what your business is contributing/taking from your personal resources. It is also generally a good idea to track your revenue from different income streams separately in order to evaluate what areas of your business are making you money.

4. Adjust for cost of living and other cost increases.

5. Adjust for foreseeable expenditures and provide for those that are not foreseeable.

6. Compare the net cash flows on your budget with your desired cash position.

7. Revisit your budget periodically and update for changes.