According to the U.S. Census Bureau, during the month of October 2022, a total of 432,834 new business applications for tax identification numbers was received. Well-established businesses tend to have business plans and budgets and it’s important to have these things when starting a new company.
Continue reading this article for some basics of practical budgeting for start-ups that could also be applied to already established businesses.
Forecast your financial statements
Many businesses that have been up and running for a while base their budgets on the previous year’s financial results. Of course, start-ups lack historical financial statements, which can make budgeting difficult.
For the first year of operation, however, an entrepreneur can create an annual budget by forecasting the monthly numbers that will likely be reflected in the three basic parts of their financial statements:
1. The income statement. Start your annual budget by estimating how much you expect to sell each month. Then, estimate direct costs (such as materials, labor, sales tax and shipping) based on that sales volume. Many operating costs (such as rent, salaries and insurance) will be fixed over the short run.
Once you spread overhead costs over your sales, you might not be able to report a net profit in your first year of operation. Don’t panic! Profitability takes time and hard work. Once you turn a profit, however, remember to save room in your budget for income taxes.
2. The balance sheet. To start generating revenue, you’ll also need equipment and marketing materials — including a website. Other operating assets, such as accounts receivable and inventory, typically move in tandem with revenue. How will you finance these assets? Entrepreneurs may invest personal funds, take out loans or receive money from other investors. These items fall under liabilities and equity on the balance sheet.
3. The statement of cash flows. This report tracks sources and uses of cash from operating, investing and financing activities. Essentially, it shows how your business will make ends meet each month. In addition to acquiring assets, start-ups need to cover fixed monthly expenses.
Ask for help
By forecasting these three statements every month for at least a year, you can identify when cash shortfalls, as well as seasonal peaks and troughs, are likely to occur. Naturally, you should expect to adjust the budget occasionally or even frequently to account for miscalculations and macroeconomic forces.
Your Rudler PSC advisor can help you put together a realistic budget based on industry benchmarks and market research into the likely demand for your products or services. And, again, even if your company has been operating for a while now, you may be able to gain some helpful insights from having an objective professional review your budget. Contact us at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Erin Mauch, Staff Accountant and Karen Daugherty, CPA.
If you would like to discuss your particular situation, contact Erin or Karen at 859-331-1717.
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