Getting the money to start up one’s business is a difficult task, which can be achieved via banks, alternative funding, crowdfunding, private equity investments, or any other method which will eventually deliver the cash required to sustain the business. Still, it only solves one issue small business owners should encounter.
Another major task is to budget projects correctly and achieve optimal forecast to make sure a business doesn’t run out of funds, before it reaches its goal, or starts making money
You are bound to make mistakes
It is inevitable that as a new business owner (even an experienced one, with strong business development skills) will not be able to predict the following things with new projects:
- Work capacity.
- Time it will require to finish up the production phase.
- How will clients react.
- When would sales start coming in (initial revenues).
- When would sales pick, if ever.
- And of course – how much will it cost until a project is self-financed by its income.
There’s a lot of trial and error involved in such things, and there is not a single-fit equation you can apply to all business to discover the answers.
Socrates said true wisdom is knowing you know nothing, and this logic applies here as well.
If you start off being too proud, too confident or plain-out cocky, the higher the chances you will fail. Trying to predict a budget for a project when there are so many variables involved, is very much a long-shot.
This is a list of things that are pretty much unknown at the beginning. If the owner or the MD of the company has prior experience in the same field, some of these questions might be easier to figure out. If they worked with some of the employees before, some other questions might be answered. If either one of them had prior experience in setting up very similar businesses, then another set of questions is clearer to understand, but chances are that the manager wouldn’t have the WHOLE picture, from all angles. If he does, that improves his chances of succeeding, but it’s not really a new business if he already worked in the same industry, same business model, and same employees, isn’t it?
- Employees’ quality of work
- Employees workload
- Employees longevity at work
- Office atmosphere and motivation
- Willingness to stay overtime
- Salary demands from employees
- Cost of materials
- Amount of materials required
- Additional services needed externally
- Unexpected interruptions to work (i.e. maternity leave, or just other accidents)
- Cost per acquisition of client
- Cost for each one of the marketing channels
- Conversion from lead to client
- Supply/Demand equalbirium point which will dictate pricing
- How many clients will turn into returning clients
- Overhead costs (and what would they be exactly)
- … and a bunch more.
You take everything and formulate a timeline that describes the production phase, launching phase, and sales for the six months following the launch, and continue building that timeline until a balancing point is hit; that is the place when the month-by-month profit (revenue minus expenses) is positive. You also include finance repayment in the equation.
How do you address budgeting in uncertainty
A part of starting up a business is taking risks. It is embedded in the blood of entrepreneurs starting up their own companies. This something that any business owner should put into consideration before pulling the trigger.
So, you definitely don’t stress out on the things you don’t know, and focus on the things you do.
You try to fill out as many of these points, backed up by opinions of people whom you trust and have experience in these kind of businesses, backed up by business research, and backed up by your experience and instincts. If you have no resolutions made after pondering about these points, you might be unfit for your business, and you need to go back to the drawing board.
If you managed to get to a good level of certainty on some of the things, you start guesstimating about others. You use your intuitions and experience to assume things like employee workload, and production stages, and try to be as REALISTIC you can as possible (and NOT overly optimistic).
Then you take the whole equation and start building a budget per project, based on that. Then, you look at the amount of variables you have managed to fill out “properly” with high confidence, and the things you were not sure of. You increase the budget by the percentage of variables you guessed.
So if you gathered up a list of 30 different variables relating to the project, and you had high certainty in 20 of them, and the overall budget you assume the project would require is $100,000, you increase that number by 33% (10 unknowns from 30 items), and write down the budget in your business plan as 133,333 USD.
It’s a simple method that can help you plan your budgets in a proper way, and stay cool in terms of uncertainty. Good luck!
This article is a part of MoneyTransferComparison’s Magazine (Small Business Guidance):