When you start a small business, preparing a budget, without any history on which to base your estimates, is a daunting task. You may have some idea of what you hope to earn and how much it will cost you to earn it. You can make broad estimates of income and expenses and may get your budget done quickly, but this won’t give you a tool to guage your performance and manage your business. It is better to start at the bottom and build up.
First of all, do I really need a budget?
In short, yes. A well-run household operates on a budget, even though it may not be written down. You are in business to make money - all the more reason to have a budget showing how you will do just that. A budget is an extension of your business plan and strategy, put into practice. It serves to quantify the plan in financial terms, and lends a sense of reality to conceptual ideas, transforming them into a feasible business endeavor. A well-prepared budget will serve as a baseline and an important reference point to guide your business in the right direction by providing an essential framework for the start-up and initial operating stages. In this sense, it is a very important tool in managing the business, provided the budget is based on realistic data that can be used to gauge actual performance.
Having a detailed budget will also be a distinct advantage when dealing with potential lenders and investors. It will give them a clear idea of what your business is about; how you intend to carry out the business plan, in concrete, financial terms; what the loan or investment is needed for; and how the money will be spent. A good budget will show a lender how the loan will be repaid, and will show an investor what type of return can be expected on the investment. In both cases, the budget will significantly improve your chances of getting the financing you need for the business. And if you have sufficient depth and detail built into your budget, it will be much more credible to lenders and investors.
Even though a budget is an estimate, or a projection of future events, it should be based as much as possible on actual data obtained by doing research, getting quotes, and assembling and organizing documentation and information. The idea behind building a budget from the bottom up is to start with what you know, or what you can find out. Starting at the bottom means going to the lowest level of detail, where you have building blocks – concrete pieces of information that can be put together to construct the various different line items such as revenues, cost of sales, advertising, rent, maintenance, utilities, and other overhead expenses. These building blocks are basically quantities, hours, prices and rates. Rather than budgeting total income and expenses as a certain amount per month, for example, you can break these figures down into their component parts.