The First Step to Raising Money: Developing a Budget
Successful entrepreneurs possess many common traits: creative, idea-driven, optimistic, visionary, tenacious, willing to take risks, and hard working. While developing a budget may seem counter to many of those characteristics, it is essentially the blueprint of your operation and can actually be a powerful tool for helping you realize the design of your business.
When working with start-ups, I find that people often resist investing the time to put together a budget for reasons that range from “no one can predict the future,” “we haven’t even started selling anything,” “nobody has done it before so there is nothing to compare to,” “we don’t have any money yet,” and “we’re gonna fake it ‘til we make it.” A budget does not need to be a complex pro forma created by a financial engineering wizard. It can begin with a simple tally of what you have, what you need, and what you want. A thoughtfully prepared budget can serve various important purposes:
• Assess Your Competition: As with many entrepreneurs, the vision for your product or service was likely born from the recognition of an unmet or inadequately addressed need. A budget realizes your idea by getting to the next step of identifying customers, geographic markets, and the specific goods and services to offer. Determining the price of your goods and services, especially as compared to those offered by your competitors, offers you the opportunity to reasonably estimate the level of revenues that will be generated by your business.
• Manage Your Cost Structure: Having a good grasp on expenses are critical to the viability of a company, especially in the case of a start-up where cash is a scarce resource. A major component of the budget is the tabulation of expenses. For example, connecting with customers may include the cost of advertising, attending conferences, joining business associations, and meeting with potential customers and intermediaries. Personnel typically represent one of the largest expense line items and non-personnel expenditures, such as registering a business, accepting credit card payments, incurring overhead, and buying and storing inventory, often add up to significantly more than envisioned.
• Facilitate Decision-Making: As you develop your business, you will be faced with important business issues that may include what type of marketing strategy to pursue, whether to buy or lease equipment and office space, how many people to hire, and where to source products or services. A budget can be utilized to assist you with assessing your revenues and expense levels to determine the most cost-effective methods for reaching target audiences, differentiating yourself from competitors, and growing your business.
• Express Your Vision for the Company: While it is not unusual for businesses in the idea phase to have a short-term budget of 6 months, a longer time frame of several years enables entrepreneurs to envision how they will take their business to the next level. However, a budget covering a three-year period provides you with the opportunity to design how your company will evolve, envision how quickly to grow the operation, and figure out what resources to utilize.
• Prioritizes Your To-Do List: A typical dilemma that entrepreneurs face is a crushing list of tasks to complete with only a handful of people to do them. In this scenario, it is easy to become overwhelmed; the normal instinct is to tackle the first need that comes to mind and plow through the tasks with nothing but sheer determination. By doing an assessment of revenues and expenses, a budget helps ensure that you not only consider all of the key issues, but also determine which line items require the most immediate attention.
• Defines Funding Needs and Enhances Credibility: Underestimating the amount of capital needed to start a business is endemic with entrepreneurs. A budget can help you reasonably estimate the level of cash needed for your business. A well-organized, thoughtfully prepared budget is an indication of your level of commitment and ability to succeed with your business. This, in turn, helps convince potential lenders and investors that your company is worthy of their funding. A budget is also the precursor to putting together financial statements.
• Functions as a Dashboard with Which to Drive Your Company: Just as the dashboard of a car provides the driver with the means to effectively control the operation of the vehicle, a budget is essentially the dashboard of a company that the entrepreneur uses to efficiently manage his or her business. A budget can be a valuable tool for pinpointing sources of cash inflows, monitoring cash outflows, and anticipating cash shortfalls.
Much like a business plan, your budget should be a living and breathing document that evolves as your company does. With the information that a budget provides, you can measure your progress, gauge your effectiveness, identify areas of weakness, and proactively address problems. Investing the time to diligently prepare your company’s budget will save you tremendous amounts of money and wasted effort, and enhance your ability to launch and grow your business.
Scott Cooney (twitter: scottcooney) is an adjunct professor of Sustainability in the MBA program at the University of Hawai'i, green business startup coach, author of Build a Green Small Business: Profitable Ways to Become an Ecopreneur (McGraw-Hill), and developer of the sustainability board game GBO Hawai'i. Scott has started, grown and sold two mission-driven businesses, failed miserably at a third, and is currently in his fourth. Scott's current company has three divisions: a sustainability blog network that includes the world's biggest clean energy website and reached over 5 million readers in December 2013 alone; Pono Home, a turnkey and franchiseable green home consulting service that won entrance into the clean tech incubator known as Energy Excelerator; and Cost of Solar, a solar lead generation service to connect interested homeowners and solar contractors. In his spare time, Scott surfs, plays ultimate frisbee and enjoys a good, long bike ride. Find Scott on Google Plus
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