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Make your idea a reality but first create a budget

Whilst coming up with the business idea and building that new startup is an adrenalin charged fun experience putting together your budget can be particularly dull in comparison. Unfortunately the statistics show that startups that don't have a well thought out financial plan are significantly more likely to fail. The budget therefore is an essential task if you are thinking about launching a new entity. Here are a few tips in terms of things to look out for and actions to take when preparing your first budget.

Feasibility Study

Before even putting pen to paper to create your startup budget you should sit back and take a more global look at the market and the potential for your idea. If your idea is something that has already been done then it shouldn't be too hard to get an idea of the market size and the potential revenue/gross profit that people are generating from that business. Information in regards to the viability of the existing market can be found in a variety of places including annual reports, business for sale websites, bureau of statistics information plus a range of other sources. If you think that there might be information out there about your prospective industry then you should spend a few days digging and surfing the internet to see what you can come up with.

If the business that you are looking at starting is a new concept or a significant departure from what is currently available then your job is going to be a lot harder. Despite it being harder you should still make an effort to try to build up a picture of what the potential market is and who your potential customers are. You could potentially do this by carrying out surveys, having customer focus groups or getting out and door knocking.

Even if your new business is totally different to anything that has previously been done you should try to scope out what you think the market size is and what the market potential is. If you are not sure what to do then it may be an idea to talk to a local accountant or a marketing consultant to get their ideas in terms of how you can estimate the potential market size. A small amount of money spent with consultants in the early days could end up being money really well spent.

Work on some broad goals

Before you get into the nitty gritty of building your budget it is important to have a general idea of where you want to take this business. Even if you are just estimating where you want to be in 12 to 24 months you need to have this view before starting out. If the existing market is worth 100 million dollars but there are already 200 competitors within that market it is probably ambitious to target turnover of 2 million in the first year. Try to be bullish and realistic at the same time.

Generate your sales budget

Now that you have an idea of what the overall market looks like and what piece of it you want to claim you should start thinking about how this translates into sales. Your sales budget is the key to the overall budget so don't simply sit down and make up some figures, think about the logic behind what needs to happen for you to generate sales and think about the timing of how quickly those sales will come in.

A lot of sales processes work like a funnel, you generate a lot of leads and activity then those leads become more qualified and eventually they turn into paying customers. In the case of online marketing via a website this would be attracting visitors to your website, gaining engagement from those visitors and then eventually convert them into customers.

Most sales will cost you money. Whether it be employing sales people to interact with your potential customers or whether it is Google Adwords/SEO to bring visitors to your site. Make sure that you break down the sales process and the sales funnel so that you know what the drivers are and what the costs are at each stage.

Be realistic, there will be things that happen that will cause delays and there will be training issues in relation to staff. In addition, it may also take you a few months until you fully understand all of the steps involved in the process and the timing of each of these steps. For these reasons, it is always best to start with a relatively conservative sales budget and then have it build over time.

Your cost of sales

After spending time putting together your sales budget you should have a pretty good idea of the processes involved in getting a sale and the costs that are involved with those processes. Your cost of sales will therefore be driven by the assumptions that you have made in creating your sales budget. Again, try to be as accurate as possible with these assumptions. Try to get external advice or at least bounce the assumptions off a colleague or family member before locking them in. You need them to be as water tight as possible.

Don't just think about the direct costs involved, try to think about indirect costs as well. If you are selling a physical item then you need to think about storage costs and logistics related costs. If you are shipping items then you need to take into account the postage cost or the shipping cost. The more time you spend breaking down all of the components the more accurate your budget will be.

Your staff costs

When it comes to staff involved in your new startup you should look at ways that you can minimise the headcount until your new venture starts generating some revenue. Potentially look at outsourcing some of the non core tasks. Companies like Ruby Receptionists can handle a variety of your admin tasks and will do this on a per minute basis as opposed to having to pay for a full time person.

For the people that you do need to employ, make sure that you include all staff related costs including any superannuation, provision for annual leave and any state/federal taxes that may be applicable. You will also need to have workers compensation insurance in place in case anyone gets injured in the workplace.

Your overheads

Try to think through all the various costs that you will need to run this business. If you are not sure exactly what you might be up for try to download a few sample profit and loss reports from the internet and work through the line items to see what you might potentially need to use. For a lot of items (eg insurance) you should be able to get a quote to get a reasonably accurate idea of what you are going to be up for.

Your cashflow budget

Once you have your profit and loss in place you should also look at preparing a cash flow budget. For the cash flow you will need to look at the timing of the inflows and outflows along with any capital expenditure that you need to do. Again, don't be too optimistic when it comes to estimating these flows, it is better to leave a buffer rather than be caught short in the first few months.

Review, review, review

Once you have finished your budget document don't just print it off and put it in a drawer. You should review your document regularly and make revisions where possible. The budget and reviewing/revising that budget should become an integral part of your business management. Once you have a really good understanding of all of the drivers of your business you should be in a much better position to maximise your returns.