Crafting a Financial Plan for Your New Business
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Creating a budget for startups can be a tricky task if the proper steps are not taken. Multiple elements are involved in budgeting, and in addition to that, entrepreneurs must juggle other business-related activities and fulfillment of government regulations. Even though it may appear daunting, startups must establish a budget and follow it.
In order to make sure that your business is able to meet present and future needs, a budget should be created that estimates its anticipated income, expenses and cash flow. When there is not enough previous financial data to come up with an accurate budget, the best possible guess should be used for the income and expenditure.
If you don’t have the expertise in accounting and don’t want to pay a lot for professional services, consider turning to a freelance accountant for UK startups. In any case, take a look at this guide to get an idea of the importance of budgeting and how to make one.
What are the benefits of budgeting for new businesses?
Many justifications may be concocted by entrepreneurs to explain their lack of budgeting.
However, there are numerous motivations that necessitate that you plan out a budget. Let’s explore a few of them:
Keeping a tight grip on financial matters is crucial in order to ward off unexpected expenses in the future. Proactive planning for possible issues in the market can help entrepreneurs to maintain control over their business. Moreover, making efficient, timely decisions is also made easier. It is important to be clear about the objectives and priorities, and to make sure that there is sufficient cash at hand for any strategic projects.
Nobody can accurately predict the future, but with a budget, you can be prepared for any potential surprises. Having a budget plan is essential for startups as it increases the likelihood of success compared to having no plan.
What are the steps to put together a financial plan for my new business?
It is essential that your budget be kept up to date and flexible, so that it can be revised or amended to accommodate any changes in the size of your business
The following are 6 steps to formulate a budget for your startup:
Estimate your fixed outlays
In order to build a budget, the first step is to monitor your expenditures, both fixed and changing costs.
It is not difficult to determine the fixed costs that must be paid out every month to maintain a business. These are the vital expenditures that are needed to run the business, such as rent, electricity, and insurance premiums.
Work out these costs in two phases
- Analyse the expenses for the business that occur on a regular basis
Compute the total of the consistent and repeating expenses each month.
The cost per unit can be calculated by dividing the overall fixed cost by the amount of units produced.
Estimate your variable expenses
These payments can differ. In your business, variable costs will be based on the amount of products or services you have to provide in a particular time frame.
For instance, if you manage a car manufacturing firm, then the outlay of raw materials and wages for the workers who assemble each vehicle will be among your variable expenses. If you decide to make a larger number of cars, your requirements, and consequently, your variable expenses, will grow.
Every industry has its own unique variable costs that need to be monitored closely. Companies have the opportunity to cut down on unnecessary expenses through careful tracking. For example, if you have a large inventory that is not expected to be depleted in the near future, you can avoid additional production and save money.
Identifying one-time expenses
One-time expenses are particularly pertinent to startups, though they don’t occur as often. These could involve buying necessary furniture, the website domain name, software, etc. Even though these costs are not recurrent, having a backup fund for urgent needs is a wise idea.
Calculate projected earnings
In order to make sure that all expenses are taken care of, business owners should be aware of their expected revenue and its source.
One way to evaluate your business’ performance is to take the quantity of sales and multiply it by the revenue generated from each sale.
As an example, if you are a retailer of artificial jewelry, your income can be calculated by multiplying the number of items sold by their individual prices and then summing them all together. For instance, for each pair of earrings sold at £10, bracelet at £20, and necklace at £30, your total income can be ascertained.
The cost of forty necklaces is £1,200, with each piece priced at £30.
The cost of twenty bracelets is £400, with each one priced at £20.
£10 multiplied by 60 equals £600 when it comes to earrings.
Therefore, the sum of your income comes to £2,200.
When launching a new enterprise, it’s unlikely that there will be prior data on which to base sales projections; thus, it’s best to be prudent when predicting sales. This doesn’t mean that sales cannot be increased, however, it is advisable to not overextend and overestimate income as this could lead to expenses that surpass one’s abilities.
Monitor your gains or losses
Calculating the net profit margin of a company can give you an indication of its success. This number is reached by subtracting operating costs, interest, and taxes from the total amount of money earned.
To start off, it is important to be aware that the revenue your business brings in is not necessarily the same as the profit made. Revenue is simply the money that comes into your business via sales before any expenses are taken out. Even if your revenue is high, you may still be experiencing a considerable deficit.
In order to keep track of your finances, compile all the numbers into a Profit and Loss (P&L) statement. Add up the total income and total expenses, then subtract the expenses from the earnings. If the difference is a positive figure, it is a profit, but if the result is negative, it is a loss.
It is beneficial to be aware of your financial status in order to make prudent budgeting choices.
Examine the budget
Constructing a budget for a business is not a single process; it requires frequent review. If your business is consistently making profits, contemplate methods to amplify or extend your enterprise. Conversely, if your company is experiencing continual losses, contemplate strategies to reduce expenses and modify a business plan to generate more revenue.
By taking the time to look over your budget, you can remain in control of your finances and ensure that you are using your money wisely. This analysis can lead to discovering methods of cutting costs or earning more income.
The key to success in business is to have well-thought-out plans and meticulous accounting. It is beneficial to enlist the help of a professional in the first year of your business, as they are able to gauge your current situation and anticipate the future based on their expertise.
Get in touch
At YRF Accountants, we have expert team of qualified and experienced accountants & advisors who can help you with your startup business. If you are looking for Accountants in Bolton, please feel free to contact us.