Budgeting for an established business is easy. You simply take last year’s results and make changes based on new information. Maybe you have a new client that will increase sales, or maybe gas prices are on the rise which will cause your expenses to increase substantially. Since the past is often the best indicator of the future, it is relatively easy to budget for an existing, well established business, but how do you budget when there is no history to build off of? How can you budget for a startup?
There are essentially 3 ways to budget for a startup:
1. Utilize Competitor Financials – One of the best ways to determine what you should expect in terms of gross margins and profit margins is to look at your competitors financials. This will only work if you have a competitor that is a publicly traded company who is required to present quarterly financial statements. For example, let’s say you want to open a coffee shop. The first thing I would do is visit Yahoo Finance and check out financial statements for both Starbucks and Dunkin Donuts. Your business will not be exactly like these large publicly traded companies, but it should give you a rough idea. For example, you will see that Starbucks Gross Margin is approximately 60%. If you are projecting 20% or 90% gross margins you are probably off.
2. Get Quotes – Generally you should be able to get a quote for just about any expense. If a supplier wants your business, they should be willing to provide a quote to help you develop your budget. This is probably the most straightforward and accurate way to build a budget. Unfortunately this can be time consuming. Do you really need to call an internet service provider and determine whether internet service will cost $45 or $50 a month? Probably not. You should be able to make reasonable estimates for many expenses, and then you can simply call to get quotes for everything else.
3. Guess and Refine – When all else fails, just guess. If you are unable to track down competitor financials to help you build a budget, and you can’t get a reasonable quote for certain expenses, then it is simply time to guess and refine. Your budget can be a living document that is constantly changing when you are a startup. Aggressively test your assumptions as a startup so that you can build a realistic budget in the future.
About the Author: Adam Hoeksema is the Co-Founder of ProjectionHub. ProjectionHub helps entrepreneurs create financial projections without the need for a PhD in spreadsheet modeling.