How First-Time Business Owners Should Create Their Initial Budget
If you've decided to branch out and set up in business on your own, you may have a solid idea as to how you're going to sell your products or services, but are only just starting to work out the details. One of the tasks ahead of you is the creation of a budget for the next financial year. This can be a daunting proposition for those who've never done it before, but it doesn't have to be overwhelming if you take a step-by-step approach. What do you need to know?
Start in the Right Place
A good accountant will advise you to start not at the top, but at the bottom. This may seem to be counterintuitive, but if you know what you need to achieve in the final analysis, it will make it a bit easier to structure the way you're going to approach it.
What's Your Profit?
In this way, you need to figure out how much profit you want to make over the course of the year. There is a fundamental point to remember, however. Your profit is not your salary. Many new small business owners make this mistake. You need to allow for your salary as an expense of running the business. It's not a reward, but is compensation for the time that you're going to put in to the operation. You can regard the profit as the reward, if you like.
Indirect Expenses
Next, you need to figure out all of your operating expenses. These will include any office space, charges for Internet and phone access, insurance premiums, vehicle costs, and so on. Make reasonable projections for these, but always question whether any of them are absolutely necessary or could be renegotiated downward.
Direct Expenses
Next, you need to look at the cost of actually producing your product or service. These are classified as "direct" expenses and are necessary to produce your saleable commodity. You can include any wage cost here, if you need to employ somebody to make your widget.
Getting the Figure
Once you've got all these figures calculated, you can add the profit, the operating expenses and the direct expenses together and this will give you your revenue target for the period. Now you want to figure out whether that is realistic and what strategies you're going to use in order to hit those figures. Certainly, break it down into monthly or even weekly segments and that will make it easier for you to project a reality.
Answered Your Questions
If you are uncertain about any of these financial terms, or want some advice on how to create your budget, it is advisable to talk with a qualified accountant for help.
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