Budgeting-Setting Up Your Business- Part 6

In my last blog I wrote about brainstorming to come up with a business idea and importantly afterwards to eliminate all of those ideas that failed for some reason or other. Allow me to elaborate on that for a moment… Challenge is that if you’ve really let your hair down and written most every daft or otherwise idea down, many of those ideas might be fun, but won’t be practical. What I suggest you do is to apply some simple rules to whittle the list down – and don’t be disappointed. If you’re left with 2 or 3 ideas that are deserved of much more in depth research.

For example, one idea might sound good, but you may choose to eliminate it because it will take a huge amount of capital that you don’t have. Another might be to similar to products already on the market and introducing yours will be fraught with challenges from competitors.

Bear in mind that the best ideas will be difficult for others to copy, by which time you will have moved on.

So, you’ve reached the happy stage where you’ve decided on (let us say) a product to sell, now comes the essential next step of establishing a budget so you can be as sure as you can be that your idea would be profitable and after that, how to establish whether there are people out there who would willingly buy your product or service.

Before I move on to budgets, let me say that I recognise there will be people who will say we should be looking at the market for the product before we waste our time on the budget. My reasoning though, is that without a budget you won’t be sure what your selling price is, because if you’re doing market research and ask a prospect “would you buy this orange widget”, then surely then if they have a need they will ask how much it will cost.

So to budgets and the purpose of them. The term budget is bandied around a little, yet I find surprisingly few business people who fully understand and embrace them as one should. So importantly, to the purpose of a budget. The Oxford Dictionary definition of a budget is “a projection of income and expenditure over time” and I guess that’s hard to argue with, but what we are looking for is the answers that such budget will give us. On a spreadsheet you will be able to manipulate the budget to demonstrate “what if” scenarios, such as “what if the wage bill is 15% higher? What if I increase the price by 25% and there’s a 10% reduction in revenue? These, as you’ll find are critical things to understand and even more critically, to be able to calculate.

So in more simple terms, besides the “what if” abilities and the dictionary definition, what is this budget? Your budget is a complete list of all the projected income (revenue) from all sales across a year (or other given period), totaled up and from which, the total of your costs and expenses (purchases, wages, travel, rent and rates) will be deducted, thus showing the potential profit/loss before tax of your venture. This will show you whether its all likely to make a healthy profit or otherwise and much, much more.

I strongly urge you to use a spreadsheet such as Excel or Apples Numbers, because whilst it may take you longer to program initially, when you come to make a change, all your hard work programming with be paid back with interest.

Like the example below that you can download and use with our compliments, you should create a matrix showing the weeks and months on one access (ideally across the top) and income and costs down the left. The concept is for the spreadsheet to do the calculating.

Click here to download a budgeting template

Next time I’ll write about understanding what the budget means and how it will help your decision making.

Until next time…

avatar Name: Alexandra Eager
About: Alex has worked as a Financial Controller and Finance Director for many years for a variety of companies across a range of industries but more recently she has moved away from accounting working for an internet marketing agency as Finance and Operations director, primarily overseeing the finance functions and search engine optimisation (SEO) for clients. Follow Alex on G+ and on Twitter @Alex_BusDirUK
Alex runs her own company with two fellow owners developing a suite of e-commerce web sites and promoting them directly. “I found that SEO and finance were quite compatible both needing an eye for detail, research and analysis as well keeping up with new developments and changes.”

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