Many entrepreneurs looking to start or grow a business are often faced with the hard decision of formulating a budget. However, figuring out what goes where and determining whether the company will meet the set goals is mandatory. So use this startup Malta practical guide to start planning your budget.
Budgeting has lots of advantages. Failure to budget is likely to send your business tumbling. It is a financial drive that keeps your business afloat. If you want your startup to prosper, you have to maintain a financial plan – both short-term and long-term to enable you to keep the cash flow consistent.
What Makes a Good Budget?
A practical and realistic budget is one that maps out the monthly plans for not less than a year as well as the quarterly plans for a period not less than three years. In a nutshell, it should cover the short-range plans and the long-range plans, which will allow you make consistent financial reports.
The budget should be prepared two months before the fiscal year close. This gives one enough time to accumulate the relevant information and correct any mistakes if at all there are any. To avoid complications, if you are preparing a short-range budget, ensure that the long-range budget is also updated.
There is one mistake that most people make. They provide a financial budget with plans only for the income statement. What they forget is just how important a budget for the statement of financial condition is to their business. A balance sheet allows a business owner to factor in potential cash flow requirements for the company, not just in regards to income and expenses.
A good example is when you have been running a business for a while then you introduce a new brand or product line. You will have to take into consideration the effect inventory buying has on the existing cash flow.
Focusing only on the income statement has no provision for a comprehensive analysis of the impact of particular expenses on your business’ financials. A budget will come in handy one day when you have plans for expansions. It will help you determine whether your business can sustain it and still run or not.
In a nutshell, a startup budget will help you have a flawless bookkeeping record and set better goals. You are not limited to creating only monthly and quarterly budgets, but you can come up with one every week. Your startup should have an overall budget that covers everything including the expenditure as well as the revenues. This way, you will not spend more than you earn.
What Should You Do in a Startup Budget?
The reason why a startup budget is so complicated most of the time is that it involves making the most realistic assumptions ever. Before you go further, here are things you should consider:
- The number of sales in a year.
- The expected growth the year after that.
- The selling price of your goods and or services.
- Cost of production as well as the amount of needed inventory.
- The operating expenditure.
- The number of employees, how much they will be paid, how much you pay yourself. and the payroll as well as the unemployment taxes and the benefits you will offer.
- The needs of your premises and facilities, the income tax rate and the incurred costs for rent or debt services.
- The necessary equipment over the years.
- Terms of payment to the customer and what the suppliers will offer you in payment terms.
- How much you will borrow, the collateral and the interest rate on loan.
- How to Create the Budget
It shouldn’t be that hard to come up with a realistic budget for your startup Malta. If you can’t bring yourself to begin creating the budget, you can make use of platforms like Quicken or Microsoft Money. The two are budgeting software with enough details of possible projections.
You can also sit down and prepare the budget manually. While at it, you can get help from the budgeting tools that accompany a variety of bookkeeping software
The first thing you should do is to come up with a short-range plan for one year. Begin with the first month and come up with a practical projection of where your cash goes in all your budget groupings. Pay close attention to the sales figures as they will make a basis for the gross profit margin and will aid in computing the expenditure as well as the trade receivables and the remaining merchandise to keep the business running. Here is a breakdown of the considerations.
Scrutinize the potential market you will operate on to get a picture of how much your goods or services can sell. Considering the competition, the demand, and the prevailing market conditions will also come in handy.
2. Cost of Goods
Determine the cost of production of every product or service on a percentage basis.
To determine the expenses, you will incur while running the business, things like insurance, advertising, repairs, among others will give you a clear projection. Factoring in the taxes will make the statement complete.
4. Balance Sheet
Categorize all the items depending on their nature, and make an inventory of the accounts receivable and the accounts payable. Eventually, you will get the cumulative figure depending on the reflected period of operation.
Ensure that you have all the necessary information on your assets; whether fixed or current. Consequently, break down the liabilities, and the stockholder’s equity separately.
Keep in mind that you should do this for the month-to-month plan, and then prepare the budget for the long-range plan, that is, for the second and the third year.
For the whole process
The income statement budget comes first followed by the balance sheet, and finally the cash flow. Ensure that you know the net income figure before you go ahead to formulate a pro forma balance sheet as the profit figure is added to the retained income. As for the cash flow prediction, the income and the balance sheet statements will help.
It is also critical to seek out help from a certified accountant while preparing the budget regardless of whether you are using software for the process, or doing it manually. In fact, hiring a CPA might be the solution if you do not have much background I the finance sector. He or she will help you during the planning and the preparation of the budget. Their expertise will be invaluable and will go a long way in ensuring you don’t make any blunders. Companies providing corporate services are also a great option to outsource all your accounting and tax needs.
Now you have it, a comprehensive guide on how you can prepare a business startup Malta budget for your business. See? It doesn’t look that complicated, does it?