Reading time: 2 minutes
In a survey of recent college graduates published in August by the AICPA, more than half of those graduates plan to start a business someday. Regrettably, they also estimate that only half of the new businesses will make the five-year mark, and only one in three survive the 10-year mark.
What do you do if you want to improve your odds of success?
Entrepreneurs can create realistic, comprehensive budgets to help navigate the struggles that await them.
Three Financial Statements
A lot of businesses will use the prior year’s financial results to base their budgets. But the lack of historical financial statements for start-ups may make budgeting more difficult.
Within the first year of operation, it would be helpful to put together an annual budget that forecasts all three financial statements every month:
- Income statement. Begin with estimating your expected sales each month. Then you can estimate direct costs such as labor, materials, shipping, and sales tax based on your sales volume. Operating costs, such as salaries, rent, and insurance, will be fixed over the short term. When you view your overhead costs over sales, it’s unlikely that you’ll report a net profit within the first year of operation. It takes time and hard work to be profitable! However, once you do turn a profit, it’s important to remember to make room for income taxes within your budget.
- Balance sheet. Marketing tools (such as a website) and equipment will be required once you start generating revenue. Revenue will also typically move other operating assets (inventory and accounts receivable). How will these assets be financed? Taking out loans, receiving money from investors, or investing personal loans are common among entrepreneurs. You will find these items under equity and liabilities on your balance sheet.
- Cash flows. To track uses of cash and sources from investing, financing activities, and operating, you would use this report. It reflects how your business will make ends meet monthly. Start-ups require cash to cover fixed expenses in addition to acquiring assets from month to month. You can note when cash shortfalls, seasonal peaks, and troughs are likely to happen by forecasting these monthly statements.
A Reality Check
Budgeting isn’t static. A budget is adjusted each month when entrepreneurs compare actual results to their budget. For example, you may have spent more or less than anticipated if you underbudgeted or overbudgeted on certain items.
Macroeconomic forces may result in some variances. For instance, an economic downturn, new competition, or increased government regulation can have an adverse effect on your budget. These items may not be controllable by an entrepreneur, but it’s essential to recognize them early on and create a contingency plan before variances become a problem.
Consulting an accounting professional, especially one who specializes in your industry, may be helpful for your start-up when putting together a realistic budget based on marketplace demand for your products and services or industry benchmarks. A budget prepared by a CPA can be more than a management tool, it can also serve as information for investors and lenders who are interested in learning more about your start-up’s expected financial results and operations