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Neglecting to Prepare a Budget Can be Costly

Preparing accurate budgets for your new small business is an important step in making sure your new enterprise will succeed.

If you ask people what makes a start-up business successful, they'll probably say, "a great idea," "offering what people need," "the right location." Preparing accurate numbers might not make the list but small business budgeting often means the difference between success and failure.

Preparing a budget for a new business offers more challenges than an ongoing enterprise. Many cost figures will need to be researched since you don't have company history as a reference.

Start-Up Costs Budget

Your initial budget should include all your pre-business expenses. How much will it actually cost you to get started? These expenses could include registering your business name, getting a business license, paying a rental deposit, and having marketing materials printed. What do you need for equipment, tools, and inventory? Your business space may also require renovations, fixtures, and furniture. In addition, research the taxes paid by your type of business. Examples include sales and meals taxes, and if you are hiring, payroll taxes and unemployment insurance. As part of the pre-business process, you will need to register with the appropriate state agencies.

After preparing your list, take time to do thorough research and get bids on items. Purchasing second-hand fixtures, office equipment, and furniture can provide substantial savings. Assign amounts to each category and don't forget to include a contingency line—say 10%--to cover things you've forgotten or that pop up.

Operating Costs Budget

This budget will provide a snapshot of the cost to operate your business for a certain period, at the minimum one year. It is critical during this phase to be as complete as possible. First, identify all the cost categories common to your type of business. Your accountant or industry association can help.

Costs can be categorized as fixed or variable. Fixed means they remain the same at every level of sales. Rent, insurance, some utilities, full-time employees, and contracted services fall into the fixed category. Variable costs go up and down with sales—for example inventory costs, utilities used to make a product, and supplies. Ratios are often used to make budgeting easier but actual costs should be gathered to verify that ratios are accurate.

For example, food costs in a restaurant should come in at 30-35% of sales, meaning a $1 menu item shouldn't cost more than $.35 to purchase. This target amount will help you while planning food purchases and also in developing your menu. The cost of each item and dish should be calculated using prices from your food service company. In the retail industry, most stores double the cost of inventory, so cost of sales is 50%. Use that figure to price your merchandise properly.

It's helpful to prepare a budget at different levels of sales using these ratios. Your business will break-even when sales cover all variable and fixed costs. To make a profit, your business will need to generate sales above this break-even point.

Cost information can come from a variety of sources, including service providers, businesses in your field, and government agencies. Get several quotes for insurance, internet, or professional services so you can compare and choose the package right for you. Insurance required may include business liability, commercial vehicle, and property coverage, and agents often give discounts on full packages. When estimating electricity use, heat, and water, ask your landlord or the utility companies for a past history of use.

Many industries have developed ratios for labor costs, which is useful in figuring out how much to spend on employees. The local employment office can provide information on wages. They will also give you information on figuring out employer share of payroll taxes and unemployment and worker's comp insurance costs.

Marketing is one of the trickiest areas to budget. It's important to allocate some funds for promotion but it's also easy to spend too much on advertising that doesn't yield results. Marketing can include signage, printed materials, website and social media, media advertisements, sales, and events. Talk to other businesses in your industry and local area to find out what is working best for them. It's best to budget an adequate amount but spend it cautiously, testing out various avenues for results.

Some expenses are often overlooked or underestimated. They include repairs, equipment or fixture replacement, spoilage, supplies, spikes in energy costs, and perhaps most important of all—owner's salary. That's why it's critical to get feedback on your completed budget from friends in business or professional advisors.

The Missouri Small Business Development Center has a free workbook you can use for small business budgeting and other pre-business planning.


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This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.

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