While turning a passion or dream into a business enterprise can be an exciting adventure, some realities of running a business may seem less appealing to tackle – including how to finance your business properly.
Between March 2021 and March 2022, over 753,000 opens in new window new businesses were set up in the UK.
However, two of the most common causes of UK start-up failure are running out of funds and pricing issues opens in new window.
There’s more to business finance than just setting a price and paying your taxes and creating a business budget can be a good place to start.
Read our 9 tips for starting a business on a small budget opens in new window.
Researching your business budget
If you’re starting your own business with little or no start-up experience, it can be challenging to get a clear picture of costs opens in new window, from overheads such as salaries to variable expenses such as shipping or materials.
Before setting a business budget opens in new window, it could be worth spending some time researching what costs are associated with setting up the kind of business you want.
A budget for opening a café may be different to the one needed to set up an online shop or boutique, with different types of costs involved.
Calculating your income and costs can be a good idea, including how much you charge for your products and services and how many sales you would need to make a profit.
When researching your business budget, there are several things you could consider including:
- looking at what prices your competitors are setting
- talking to wholesalers opens in new window to explore cheaper costs
- contacting multiple suppliers to get a better idea of pricing before committing
- researching any government grants opens in new window that could help cover expenses
- networking with other start-up owners to ask how they arranged their business finances initially.
Find out if a Start Up Loan opens in new window could help get your business off the ground.
How to create a business budget
A business budget is critical for creating a clearer picture of your start-up’s finances and could help make more accurate financial projections.
Expenses
When creating a business budget for your start-up, there are different types of costs you should consider including:
Fixed expenses/overheads
These are regular, fixed monthly costs not tied to your business’s success.
This means you’ll always need to pay these costs regardless of the monthly sales or amount of money your business makes.
Regardless of your start-up’s performance, these expenses are essentially “fixed” and must be paid for.
Typical examples of fixed business expenses can include:
- cost of premises (rent or mortgage) opens in new window
- employee wages and benefits opens in new window
- utilities opens in new window
- insurance opens in new window
- loan payments opens in new window
- banking costs opens in new window
- travel
- National Insurance opens in new window
- supplies and materials opens in new window
Variable expenses
Variable expenses are monthly expenses that fluctuate, usually in line with business activity, but are still necessary to keep your start-up running daily.
Common examples of variable expenses can include office supplies, stock, freelancers opens in new window>, marketing and advertising opens in new window, and workspace energy and water costs.
For example, packaging and shipping costs opens in new window are variable.
If your business sells and ships lots of products in one month, its packaging and shipping costs will increase in line with the additional sales.
If sales fall, then packaging and shipping costs may also reduce.
Variable costs, therefore, vary depending on business performance.
Read our guide on how much to spend on digital marketing for your start-up opens in new window.
One-off or exceptional expenses
These costs don’t happen often but could be essential to making your business goals a reality or keeping your start-up running.
These one-off costs could include buying speciality equipment and paying for ad-hoc repairs.
You can find out more on the government website opens in new window.
Income
Your start-up’s income may be an influential factor when setting a budget, as it will ideally be spent generating more income.
A business’s typical income is through product sales and service fees.
However, income can be from any source opens in new window, including rental, interest on commercial loans given, grants, and returns of other investments made by your start-up.
An income budget is a projection of the income you expect to receive over a financial year.
To set an income budget, there are a few factors you may need to seriously consider, including:
- the cost of raw materials/preparation time
- the mark-up per product/service
- how many sales your start-up makes opens in new window
- the number of sales per customer
- the price you sell products or services opens in new window
- the amount spent per customer
- your expected profit margin. opens in new window
Business budget planning tips
Prepare for the worst
Sometimes unexpected problems can arise.
To protect your business, it may be wise to keep a pot of money aside to help minimise any potential damage caused by disruption.
Having a good amount of working capital opens in new window can mean your business can weather unexpected costs and still meet its regular, ongoing costs.
Read more on how to manage finances during difficult times opens in new window.
Prioritise fixed expenses
When factoring in all the costs needed to create a business budget, you could avoid potential financial issues by prioritising fixed expenses.
Because they are non-negotiable expenses, it’s essential to have money available to cover them as soon as they need to be paid.
Regularly review your budget
Regularly reviewing your budget can be one way to stay on top of your business finances.
Doing this could help you recognise where to adjust spending on your business, understand your business’s financial reality, and keep your expectations in check.
Monitor cash flow
Just because you have set a business budget doesn’t mean it needs to be rigidly followed.
Regularly monitoring your cash flow opens in new window could ensure your start-up is sticking to the budget and help identify any areas needing financial adjustment.
Be prepared to adjust your plan if needed.
Be realistic with your expectations
Starting and running a business can cost a lot of money, but it can still be done on a tight budget.
It could be worth researching the financial reality of running a business to keep your expectations realistic and taking time to understand all the costs that could be involved.
Thinking of starting a business? Check out our free online courses in partnership with the Open University on being an entrepreneur.
Our free Learn with Start Up Loans courses opens in new window include:
- Entrepreneurship – from ideas to reality
- First steps in innovation and entrepreneurship opens in new window
- Entrepreneurial behaviour opens in new window
Plus free courses on finance and accounting, project management, and leadership.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
