How To Set Your Budget for A New Business

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Setting your business budget can be an overwhelming experience. The reality is that your new venture is going to incur a multitude of expenses. If you're not prepared, one overlooked bill can disrupt the delicate financial balance of a new business, potentially leading to its downfall. Without a well-crafted business budget, you risk not having a clear financial roadmap, which could lead to overspending, underestimating costs, or missing out on potential revenue opportunities.

When you're setting up your business plan, a comprehensive business budget is not just a necessity but a crucial tool that can guide you through the uncertainties of business. A well-crafted business budget is the foundation of your business's success, providing a roadmap for your costs and revenue. It's a reassuring guide that, without it, your venture is at risk of becoming another failed statistic. With a comprehensive business budget, you can feel secure and in control of your business's financial future.

If you're unsure how to determine your business budget, these tips can help you ensure you have covered all of your bases and included everything you need to pay for.

Fixed, Variable, and One-Off Expenses

Understanding the nature of your expenses is key to effective budgeting. Your expenses will be split into different categories: fixed expenses, variable expenses, and one-off expenses.

Each category plays a unique role in your business's financial landscape, and being informed about them will help you prepare for any financial challenges.

Your fixed expenses are things like rent, business rates, insurance, loans, etc., which are set amounts you need to pay each month and are vital for your business.

Variable costs are things that you pay frequently but can change from month to month. Examples include materials, wages, utilities, etc.

One-off expenses occur infrequently but can significantly impact your budget. For example, you may need to pay for repairs if something is broken or damaged, a deep clean, or to replace or upgrade equipment. Examples could include unexpected legal fees, one-time marketing campaigns, or emergency maintenance costs.

What To Include

Now that we know the three different categories and some examples of each let's examine the types of things you need to include.

Marketing

Your marketing budget is a crucial part of your business budget, typically accounting for 7 to 27% of your expected revenue. It is vital to help you spread the word about your new business and get it in front of your target audience. Inside your marketing budget, you need to consider various elements such as SEO, content marketing, print marketing, radio or TV ads, traditional marketing, and digital marketing. Understanding these components can help you allocate your marketing budget effectively and reach your audience.

Sales Budget

Your sales budget allows you to forecast your expected sales revenue and targets over the financial year. Sales budgets help you determine the cost or spend per individual product or service line, which is a specific product or service you offer, so you can get a better idea of how much it will cost you over the year to allocate appropriate funds. By focusing on your sales budget, you can feel strategic and forward-thinking in your business planning.

Stock and Production Budget

This one is pretty self-explanatory. It's exactly how it sounds: the budget you need to produce your stock ready for sale. This includes your wage bill, your raw materials, packing costs, inventory for materials and finished products, shopping, and the costs involved in ensuring you have enough products to meet demand at all times.

This will likely make up a significant portion of your overall budget and should be allocated accordingly to ensure you are always ready to fulfill orders and meet expected demand.

Overhead Budget

Every company needs an overhead budget, and overheads are those you need to pay for but aren't directly involved in the production of products or services. So it can be your wage bill, for example, for those not involved in production, i.e., reception staff, cleaners, etc., licenses, software, communications infrastructure, and so on. All are vital for running your business and required to function but not directly associated with stock and production.

Capital Budget

Your capital budget is the budget allocated to big purchases. This includes things like real estate if you choose to buy over leasing commercial premises, machinery, technology, and vehicles. These are the more expensive things you need to get going and operate and are essential for your business. Typically, your purchases for your capital budget will come from loans, revenue, or invested funds.

What Else Do You Need To Know?

There are three main ways to create your budget during the planning phase. Not all businesses use the annual method for their budgeting, and those more established may decide a rolling budget is more appropriate. Understanding these different methods can make you feel more informed and empowered in managing your business's finances.

Typically, you should aim for your budget to cover a 12-month period. However, businesses choose different methods for their budgeting.

Incremental

The traditional approach of keeping the previous year's figures is used with an extra charge to account for inflation. This is more common for businesses with at least one year of trading and experience under their belt.

Zero-Based

The opposite of the above is starting the budget from scratch on a blank piece of paper with no previous figures. If you use this method, each expense must have a direct benefit to the business and be vital for your operations.

Priority Based

This is similar to zero-based in that you do not use previous figures to work from; instead, you allocate funds on a more priority basis. This is more common for businesses with limited funds who need to ensure that their budget is where it's needed first, and then anything else is looked at with what is left over.

Take your time, plan your budget carefully, understand the type of budgeting you will be following, and ensure that you understand the costs involved in the day-to-day running of your new business to give you the best possible start.