Writing a Business Plan: Budgets

Of all of the things that go into a business plan, the budget is probably the easiest – and yet it’s the part that most people are terrified by. Some of this we can probably put down to common math anxiety, but the truth is there is very little arithmetic, let alone mathematics, in assembling a budget section, and none at all in creating the narrative that goes with it. If you have done the research, figured out what resources your new venture will require and how much your employees should be paid, then you already know everything that will go into this section – and if you haven’t, how do you expect to set up a business in the first place? The only hard part is getting the information into a form that your readers can understand, and all you need for that is a spreadsheet and a text file; you don’t even have to be particularly convincing. You do need to be accurate, however…

First, gather up all of the costs you’ve worked out to set up your business. This might include real estate, building costs, building-out costs, equipment, fixtures, telephones, computers, inventory, or anything else that you need to have purchased and/or installed by the time you open for business. The level of detail you go into is up to you, but here again you want to try to see this document from the other side of the table. If you were lending someone money for a start-up business, how much detail would you want to see? A line item for “Computers” probably isn’t enough, but a detailed accounting of each of the 12 workstations you’re going to have, down to the last piece of software and the type of ergonomic accessories is probably excessive. It’s also helpful to group them, so that all of your office supplies and equipment are together, services and insurance are together, permits and applications fees are together, and so on…

Next, you need to work out what your monthly expenses are going to be, once the company is up and running, and group those into logical sections. At the very least, you’ll want to have a payroll section (broken out by individual for a small company, or by division/group for a large one) containing salary and benefit information, a section covering supplies or products you purchase, a section covering utility and telephone expenses, a section covering office supplies and equipment, and a section covering insurance, financial services, and anything you outsource to a subcontractor (including shipping and delivery, if applicable). Some people advocate producing two separate budgets: one for your standard month, and one for all of the things you plan to do before you start operations (sometimes called a “Time Zero” budget); you may also want to compile operating budgets for Year 1, Year 2, and so on that compile 12 months worth of budget and make provision for growth (e.g. Year 2 includes 20% more money for salaries, in case you hire more personnel and/or offer raises). As usual, it depends on your audience…

Once you have developed your budget spreadsheet – or sheets – it’s time to start on the narrative that goes with them. In this section, you will briefly explain the categories that appear on the spreadsheet and the amounts you have allocated to each one. Itemizing the individual purchases probably isn’t necessary for minor expenses; a few hundred dollars per year in office supplies for a company of a dozen people isn’t remarkable, but a few hundred dollars worth of paper clips per person per month probably requires an explanation. Keep in mind that for the most part no expense is out of the question if you can explain why you need it. If your field equipment is going to be struck by lightning, destroyed by vandals, or eaten by wild pigs, there’s nothing wrong with budgeting for replacements as often as you expect to need them. But you can’t automatically expect someone reading the business plan to know that there are wild pigs in your area of operations, or that you can reasonably expect them (the pigs, not the readers) to eat about 10% of your field equipment per month…

Some experts will suggest that you add a set of projections to the budget section, explaining how many sales you expect at which points, how much revenue you expect to generate, and how much profit you expect to have left; combined with your budget, this will give you an approximation of a profit and loss statement, and give your readers the basis for breakeven, net present value (NPV) and income analyses. If you elect to go that way, you’ll want to follow a similar style to your budget sheet; you’ll also want to include an explanation of how you intend to sell your products or services, and why you expect to realize those specific amounts of income and profit. Everyone knows that you can’t be precise about these estimates, of course, since the company isn’t in operation yet, but you can use the written section to explain why you are making these assumptions, and how confident you are that you’re right. And, of course, what you plan to do if you’re wrong…