Budgets are the financial side of your business plans.
You have to prepare a budget because you need to find out the following:
- Are you able to earn enough in the course of a year to pay your private outgoings?
- Do you need to borrow money to start your business?
- Is your business able to make enough money to survive in the long term?
In addition, you need to use your budget to keep an eye on whether the financial assumptions which you made at the beginning of the financial year remain true. If they don't, you will have to take the necessary measures to bring your finances under control.
Budgeting is like a grocery bill
Basically, drawing up a budget is like a simple grocery bill. The secret is to include everything. Most of your business costs can be estimated in a budget. If you are in doubt, ask a supplier or conduct your own research into prices. As long as your estimates are realistic and closely match the actual costs, there is not a lot that can go wrong.
If you pay rent of DKK 4,000/month, the total cost in your operating budget will be 12 months @ DKK 4,000 = DKK 48,000.
If an office chair costs DKK 500 and you need five chairs, the budget entry will be a cost of DKK 2,500.
Do this with all your outgoings.
Finally, add up all your outgoings to see how much it costs to run a business.
Estimate your sales
Budgeting becomes tricky when you do not know how much things cost or how many items you will need. You will usually find yourself in this situation when needing to estimate your expected sales for the coming year. As a newly established shoe shop, it is obviously hard to predict whether you can sell 100 or 5,000 pairs of shoes a year. Here, look at your market research and try, as well as you can, to assess how many pairs of shoes you are likely to sell.
Four key budgets
When budgeting, find out whether your business expectations are realistic and match levels of activity. Budgets help you to plan in detail.
Before starting your own business, you will need to draw up four budgets:
- A private budget will show how much money you need to pay your personal outgoings.
- The startup budget will show how much money you need to open/start/establish your business.
- The operating budget shows your expected business income and outgoings.
- A cash budget shows, month by month, whether you will have money in account/bank to pay your expected costs.