Mar 30, 2020 in Research Paper

Research Paper Example

Developing a Startup Budget

A budget is the important consideration for anyone who is looking forward to starting a business. The most important fact that every person that has an interest in operating his or her own business needs to know is that no business is similar. What that means is that every business has its specific cash requirements, which is also different at every stage of development. Therefore, there is no universally agreed method of estimating the budgetary needs of a business startup. Depending on the size of the startup, some businesses can be started on a smaller budget while those that may require inventory or massive investments in machinery may need to work on a larger budget (Canada Business Network, 2016). Many business owners also want to operate in a rented space, and this may add to the cost whether it is in renovation expenses, the cost of acquiring the property or leasing it.

The most import consideration, however, is the understanding how much seed money one needs to operate efficiently within the first months of functioning (U.S. Small Business Administration, 2016). A typical business operates under two types of costs that are categorized as either one-time or ongoing costs. The onetime costs include those that may have to do with incorporation fees and the creation of company logos. Regarding the current costs, they might include but are not limited to utility costs, inventory, insurance, and salaries and wages. Furthermore, it is important that when a person is identifying these costs he or she determines whether they are essential or optional. Classifying what kind of costs they are is important in ensuring that the budget remains as realistic as possible. As long as all these costs are expenses, they are further divided into two categories that are fixed or variable. The fixed costs are those that remain constant whether the business runs well or not, and they include rent, insurance, and advertising costs. Variable costs, on the other hand, are expenses that vary depending on the amount of output or level of sales. They include the cost of raw materials, commissions, packaging costs or those that are tied to the direct sale of a product or service (U.S. Small Business Administration, 2016). Calculating these costs in the most efficient manner requires the use of a template or worksheet that shows ongoing costs for one time. 

Essential Elements of a Budget

A budget is a financial document that is utilized for the projection of income and expenses of any business. There are different kinds of budgets, but a master budget is the main document from which small business owners can then develop other specific reports (Ashe-Edmunds, 2016). The elements of a master budget include income and expenses, overhead and production costs, and projection totals.

Income

This is one of the essential elements of a budget and is not only limited to the sales but any other sources from which the business earns. Sources such as dividends, interests, capital gains, or royalties are he part of the income segment, but if they applicable to the startup at the beginning, they can be excluded (UCLA, 2006). Therefore, if the business is operating from only one source of income, it can be referred to as an operating budget whose primary focus is on the revenue gained from sales.

Expenses

This is the other important element of a budget as it helps identify how much the business owner is spending. From the expenses side, the entrepreneur can be able to monitor and calculate other costs that include the production and overhead expenses. The importance of having expenses calculated is that the owner can know which areas can be cut in their spending during the underperforming periods (UCLA, 2006). After listing the expenses that will be incurred during the year, it is important that they are labeled as either fixed or variable. 

Overhead and Production Costs

Once the budget is complete, it is important that the costs are divided into production and overhead costs that are critical in determining how the products or services are priced. One needs to identify the direct costs that are associated with delivering each unit of production or each service. The costs that are put into consideration in determining the price are pegged on the type of business and they may include the cost of labor and materials (UCLA, 2006). Those costs that are not tied to production such as office stationery, administrative or other general expenses are labeled as overhead expenses. 

Totals

This is a common component of a budget as it shows the progress during a given month or on a yearly basis. The totals can be done on a monthly basis, and they help determine whether the business has made loss or profit. The totals can also be narrowed to a particular item to show how the business is performing in that area, for example, utility costs that can help the business track how much is spent on payment of utilities such as electricity and water (UCLA, 2006). The totals are, thus, very important when it comes to handling and management of the cash flow, particularly when separate budgets are derived that shows when different bills and incomes are not the same as monthly averages. 

Projections

Although sometimes skewed, forecasts help a business owner get a glimpse of how business will be performed if he or she continues at the same levels of income or expenses. Projections are not a realistic representation of the business’s overall performance because there might be some swings regarding business production as there are times when the business experiences peaks or valleys (UCLA, 2006). The projection totals are, however, important when it comes to estimating a business’s annual performance.

Approach when Developing a Startup Business Budget

As indicated earlier, every business has different financial needs during startup, but for micro-enterprises such as sole proprietorships, they can start with less than $3,000. Some other low-cost startups include home-based franchises which can be started with as little as $1000 to $5,000 (U.S. Small Business Administration, 2016). However, it is important that every person understands the specific costs tied to their ventures regardless of the size so that they become aware of how much financing they will need to start as well as attain the break-even point, and manage their cash flows. Therefore, it is essential that every aspiring business owner understands the costs the business will incur before they start making an income. The next step is to assess their assets so that they know how much money they have to support their business during its starting phases. After assessment of the assets, they need to allocate the costs using a well-defined worksheet (Ashe-Edmunds, 2016). Finally, calculations are made during estimation, and whenever the costs prove too high, the expenses can always be revisited. 

Difference between a Startup Budget and an Established Business Budget

While there is no significant difference between a startup budget and that of an already established business, a startup focuses on specific categories of expenses, and the costs are majorly estimated as they have never been in operation (Canada Business Network, 2016). Once businesses are functional, the fixed costs can now be determined and established as a part of the mandatory payments that have to be fulfilled whether the business is doing well or not (Ashe-Edmunds, 2016). The variable expenses can also be determined more accurately as production is already continuing. Additionally, businesses can be able to estimate more accurately the areas where more resources need to be allocated, or spending needs to be reduced as in the course of operation, the totals reveal such specific areas. 

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Sample Startup Budget Template

 

FUNDING COSTS

ESTIMATE COST

ACTUAL COST

Investor funding

 

 

Loans

 

 

Other financing (grants etc.)

 

 

Total Funding Costs

 

 

COSTS

ESTIMATE COST

ACTUAL COST

FIXED COSTS

 

 

Rent

 

 

Utilities

 

 

Insurance premium

 

 

Loan repayment

 

 

Other (specify)

 

 

Total Fixed Costs

 

 

VARIABLE COSTS

 

 

Advertising

 

 

Sales Commissions

 

 

Telephone expenses

 

 

Office supplies

 

 

Website maintenance fees

 

 

Other (specify)

 

 

Total Variable Costs

 

 

TOTAL COSTS

 

 

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