Having a sound commercial idea is a great first step towards setting up a new business, but a major decision like this requires careful financial planning. So how do you set the right start-up budget for your business asks Liz Salecka.
This update was published in Small Business Update 97 - January 2012
Small Business Update from Atom Content Marketing is a monthly magazine for people running their own business. Articles vary in length and cover 'hot topics', issues of importance, and current affairs.
While many entrepreneurs recognise the importance of documenting their goals and marketing strategies, a detailed start-up budget is one of the most critical aspects of business planning.
‘A major part of doing a business plan is to identify start-up and ongoing costs from the outset. This should preferably be done using several scenarios ― such as best and worst case,’ says Ken Atwood, manager in Business Link’s business-support adviser team, who points out that the financial elements of every business plan should include sales forecasts as well as profit and loss and cashflow forecasts.
‘Preparation is important. Many good business ideas fail because cashflow has not been considered in sufficient detail,’ he stresses.
Atwood advises all potential start-ups to pinpoint exactly where costs will be incurred ― before any income ― and to quantify and cover each cost in their start-up budget.
‘You need to consider variable costs, such as materials, as well as the fixed costs/overheads. These will include things like premises, utilities, staff wages, equipment, vehicles, legal costs including insurance, advertising, and even stationery,’ he lists.
However, while certain costs will be essential, others can be minimised or even deferred.
‘You have to think about what is essential to start the business ― and what you can do without,’ explains Atwood. ‘Essential costs include repayments on loans or credit cards, as well as paying key suppliers, without which the business could not function.’
New technology, meanwhile, is one area of expenditure that can be minimised.
‘It is worth considering whether you need a new, top-of-the-range system or whether a second-hand reconditioned system would suffice to keep start-up costs down,’ says Atwood.
New businesses can also defer initial costs by leasing equipment instead of buying it.
A mechanic, for example, could start by offering a small range of services, which requires fewer tools, and then invest in additional equipment as the business expands. They could also arrange to use equipment at other premises ― possibly out of hours ― to do certain jobs.
Atwood adds that start-up budgets, where possible, should also include a contingency fund.
‘It is best to expect the unexpected and have a contingency fund to allow for additional costs not budgeted for,’ he says, adding that contingencies should also aim to cover slower than expected sales and delays in getting paid.
‘If your start-up budget is too conservative at the outset, then the risk of running out of cash ― or having to borrow at higher rates of interest to finance the operation ― is higher.’
There are a number of options to finance start-up budgets including personal savings, remortgaging or borrowing money from relatives and friends. You can also apply for bank loans or seek external finance from business angels, for example.
For some entrepreneurs, having a credit card with a relatively high limit may also suffice, but Atwood has a word of warning:
‘The credit card option is one, but interest costs are high if the balance is not paid off each month.’