Business Start-Up Costs and Preparing a Cash Flow Budget
Updated: Dec 10, 2019
An important part of any business, before it’s even opened, is a cash flow budget. A cash flow budget is used in a variety of ways in business but it is absolutely crucial for someone who is thinking about starting or buying a business. When going into business you need to be thinking ahead and planning your future, and a cash flow budget is a tool that will allow you to do this. It will help you to determine your future finances, budget for each month, and make a decision as to whether going into business is the right step for you.
A cash flow budget involves estimating your future expenses and income and provides you with a budget to work towards each month once you’re in business.
Before anything else, there are going to be costs associated with getting your business off the ground. You can break your business start-up costs into two main sections. The first is your capital expenditure, this is money you will spend in order to open your business, it might include things such as equipment, furniture, tools, vehicles, legal advice, and marketing. Every business will be different so you might need to do some research. These are the costs that are crucial to you starting your business, things that need to happen before you’re in business! You may require funding for this stage of your business, all of this has been covered in our how to fund your start-up blog.
Following that will have your ongoing costs, which are the typical costs that are associated with keeping your business open and running, we will talk more about these in detail below. Each business is different at this stage, because some businesses may just need to outlay the capital expenditure costs to open the doors and then they have money coming in to cover the ongoing costs. Such as a coffee shop, they will need to buy the equipment, furniture, products and pay a month's rent before they’re open but then the money they are making each day should cover the cost of running the business. They would need to estimate how many coffees they will need to sell each day to break even before they are making a profit, so they have a clear idea each day how successful they were.
Whereas if you were going into business as a builder you may not be paid for your first project for several months, you will be required to put things on account or pay your employees weekly, before being paid for the job. Preparing a cash flow budget will allow you to break down the costs you can expect in those months and ensure you have enough savings behind you to get through those times. In this case, this business would need to plan to have enough savings or funds to cover several months of business without income, as well as the capital expenditure costs before starting.
You can use a cash flow budget to break down your ongoing costs into different categories and give you a guide each month for what you should be spending and earning. The different categories can be broken down into income, direct costs, operating expenses, employment expenses, and financing expenses.
Everyone loves income, so let’s cover that first! Your first point of income is obvious, the work you’re doing, the service you’re providing or the products you are selling, you want to make sure you’re being paid for of course! But there are a couple of other types of income you could expect, these could come in the form of financing if you applied and were approved for a business loan, and also government grants, which are both discussed in our blog about how to fund your start-up. This is noted at the beginning of your cash flow budget, you will initially have the money you start with (savings or financing) and then your predicted weekly/monthly income.
Direct costs are something that a retail business would usually expect. If they are selling a product there are costs associated with having that product available, from buying it themselves, to shipping & handling and then possibly posting it to customers as well. This can usually be calculated as a percentage, as a business owner you should know the direct cost percentage of each sale. For example, you might sell a t-shirt for $25 but it costs you $3 to get it on your shelves, meaning your direct cost percentage would be 25 divided by 3 = 8.3. 8.3% of your sale is, therefore, the direct cost of your product.
The ongoing expenses can be completely different for each business. They are the typical costs associated with keeping your business running. To get the brain flowing, some typical operating expenses would include, phone/internet, marketing, bookkeeping, accounting, insurance, bank fees, uniforms, stationery, power, rates, vehicle expenses, registrations, rent/lease, and travel. But like we said, every business is different.
If you are buying a business from someone else, they should already have a cash flow budget you can request and use as a draft to make your own, or if you’re starting out fresh you can do research on businesses in your industry or go to your accountant for advice.
If we had a new business come to us asking for advice on drafting a cash flow budget or looking for us to do it for them, by simply knowing the industry we would already have a good idea of the expenses they would expect in their business and we would be able to provide them with a benchmark to start their cash flow budget, or even better, we can just do it for them, with their help of course!
Of course, if you have employees, you need to pay them, and you also want to make sure you’re paying yourself a fair wage. We recommend it a good idea to pay yourself a wage, this way you are budgeting your own personal income, not only making sure you are being paid to live comfortably but also not overspending through the business account for personal expenses. In your first few years of business, it’s worth saving as much of your profit as possible so your business is able to grow and expand in the future, and this will often involve initial expenses
Employment expenses will also include superannuation which can simply be calculated by 9.5% of the wages, and also WorkCover related expenses.
Finally, the last expense to note on your cash flow budget is the financing costs. These would be any loan repayments you make as part of the business, including business loans and car loans. It’s good to keep these separate on your cash flow budget as they aren’t necessarily a cost for running the business, they are costs that you couldn’t afford outright and required a loan for. Therefore, down the track, if you are planning to sell the business, the person looking at buying your business may already have the funds, making the financing section of the cash flow budget irrelevant to them.
We understand all of this may be a lot of information to take in when you’re first planning to start a business. We suggest, writing a list of expenses as you think of them over a week, prepare your cash flow budget and then leave it for a few days. When you come back to it, fresher, you will notice expenses you may have forgotten to include.
Don’t be afraid to talk to other businesses, they are often more than happy to provide information or advice, they like seeing someone taking the initiative to start their own business and will respect you for that. And of course, we do these types of reports every day in the office and work with a variety of businesses to have a pretty good idea of the different costs associated with each industry, so please don’t hesitate to contact us if you’re looking for professional advice when drafting your cash flow budget.
If you’re wondering what a typical cash flow budget looks like, jump online and do a quick google search and you will see everything we have discussed here in an excel spreadsheet type document.