Plan Your Business Startup Budget Carefully

I’m always saying small business owners are optimistic, but one place you should not let your optimism overwhelm your common sense is in planning your startup budget and your cash flow for the first year.  The biggest mistake small business owners make when they take their business plan to a bank is not asking for enough money.  They get over-optimistic in figuring their money needs for start-up and they convince the bank that those needs are realistic, so they get too little money.  Instead, it would be better to (1) Over-estimate expenses and (2) Under-estimate  sales. Here is what I mean:

Start-up Budget. Put down everything you can think of that you will need to buy or lease for your new business, to get you started Day One.  What do you need when you open the doors to new customers?  Don’t forget things like toilet paper, wastebaskets, extra phone lines, and office supplies.  The more detailed you make your start-up budget, the more accurate it will be.  You might not need all of those wastebaskets, but you might find that you need something you didn’t think of.

Income Projections. The is the worst place to be optimistic.  I know you are absolutely certain that you can knock the socks off the competition and make a $1million the first year, but don’t put that into your financial projections.  Be ultra-conservative. Two reasons: (1) The bank won’t believe your overly-optimistic estimate, and (2) If you don’t meet those estimates you will be in cash flow trouble.

Expense Projections.  You know the saying that it always costs twice as much and takes twice as long to do anything as you think.  If you think your first few years in business is an exception to this rule, think again.  In a new business, so many things can come up that you didn’t expect: extra fees, taxes, break-downs, delays, and on and on.  If you don’t plan for extra expenses, you can find yourself short of cash pretty quickly.

Compounding the Error. You can see that if your sales don’t meet your projections (because you over-estimated) and your expenses are higher (because you under-estimated), you can be in a lot of trouble fast.  If you figure your sales will be half what your optimistic self thinks, and your expenses will be twice as much, you might come out almost OK in the first year or so, while you are building your business.

And save those optimistic thoughts to keep you motivated and convince your banker you can make it.

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