Budgeting and Financial Planning for Your First Year in Business
- Akino Davis
- Dec 1, 2024
- 6 min read
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Are you feeling overwhelmed by the financial uncertainty ahead of your first year in business? You are not alone. Financial concerns are generally the most difficult hurdle for new entrepreneurs, especially professionals leaving the security of a stable employee income, but they do not have to keep you back.
In this article, we continue to discuss financial uncertainty, the biggest fear expressed by new and aspiring entrepreneurs.
The Real Fear of Financial Instability
Many aspiring entrepreneurs want to be their own boss, but one thing holds them back: financial uncertainty. Transitioning from the security of a steady paycheck to the unpredictable changes in business revenue is difficult. I remember talking to a client earlier this year; a talented urban fashion wear designer who wanted to take his business full-time. He kept putting off his dream because of a persistent worry: "What if I run out of money before my business takes off?" His fear was genuine, and many of you likely share the same concern.
It is not enough to simply make money; you must also effectively manage it. Without a clear income and expense plan, the excitement of starting a new business can quickly turn into sleepless nights and constant anxiety. Many new entrepreneurs believe that passion and hard work will be enough to see them through the first year. However, without a solid financial safety net and a well-structured budget, the journey can quickly become overwhelming.
Common Solutions and Why They Don’t Work
Many first-time entrepreneurs attempt to address this issue by limiting their spending or tapping into their savings accounts as needed. These may be effective temporarily, but they are not long-term solutions. Here's why.
1. Cutting Costs Alone Won’t Sustain You: Lowering your expenses is important, but it isn't the whole picture. Many entrepreneurs make drastic budget cuts, depriving themselves of the tools, resources, and investments their businesses require to thrive. This leads to slower growth and more frustration.
2. Relying Only on Personal Savings: Another common strategy is to rely solely on personal savings to make it through the first year. What is the problem with this? You may underestimate the amount you will require, and once your savings are depleted, your financial cushion is gone. This is where panic sets in, and financial stress can cloud your judgment.
3. Ignoring Financial Projections: Some people avoid financial planning altogether, believing they will just "figure it out." This results in unexpected expenses, mismanagement of income, and, eventually, the dreaded realization that your money is disappearing faster than you expected.
A Better Approach to Budgeting for Your First Year
So, how do you financially prepare to survive and thrive in your first year as an entrepreneur? I'd like to share some key strategies that I've recommended to many clients, including my recent fashion designer client, who is successfully transitioning to his fashion business full-time.
1. Create a Personal Financial Safety Net
Before you begin creating your business budget, concentrate on your personal finances. Make sure you have enough savings to cover 6-12 months of personal living expenses. This safety net is more than just a financial buffer; it provides peace of mind. It allows you to concentrate on your business without worrying about rent or groceries.
Consider it an emergency fund; if your business income takes some time to stabilize, your financial safety net will keep you afloat. You can learn more about creating a financial safety net in this previous article which covers the subject in depth, you can read it here.
2. Start with Realistic Revenue Projections
It's tempting to believe that your business will take off immediately, but let's be realistic. In your first year, it may take months before you see consistent earnings. To budget effectively, adopt a conservative approach. Estimate your revenue on the low side and use this projection to guide your spending. If you end up making more, that's fantastic! But it's far better to be pleasantly surprised than to struggle because you overestimated your earnings.
I sat down with “Mr. Fashion Designer” and broke down his expected revenue streams month by month. We devised a strategy for determining how much he needed to sell each month and how he could achieve it. Starting small made the entire process manageable.
3. Separate Personal and Business Finances
Many new entrepreneurs mix personal and business expenses, but this creates confusion. Open a separate business bank account right away. It is much easier to see where your business stands financially if everything is separated. It also helps you with financial discipline. My client discovered that separating his finances simplified his budgeting process and provided a clearer picture of how his business was performing.
4. Map Out Fixed and Variable Costs
Identify fixed costs (monthly expenses such as rent or subscriptions) and variable costs (costs that may change month-to-month). A list of your expected costs for the year provides you with a clear picture of how much you need to earn to stay afloat.
Here's an easy way to do it:
List Fixed Costs: rent, software subscriptions, insurance, and so on.
List Variable Costs: marketing expenses, production supplies, special events, etc.
Once you've compiled a list, separate it into essential and non-essential expenses. Knowing what's essential allows you to cut non-essentials when things get tight.
5. Use a Budgeting Tool or Template
Don't try to keep it all in your head. Use a budgeting app or a simple spreadsheet to keep track of income and expenses. I’ve created a simple, effective budgeting template that I share with my clients, and I’d love for you to use it too. It helps you visualize where your money is going, what your priorities should be, and how much runway you have. Click here to download the free budgeting template.
An Example of Real-Life Budget Planning
To illustrate further, let’s look further at how I worked with my fashion design client who is transitioning back into full-time entrepreneurship. He was overwhelmed by the inconsistent income in his last year.
Together, we developed a budget that included:
An emergency fund for personal expenses: He is working towards saving 10 months of living costs before quitting his job. This will allow him to fully focus on his business without the stress of making ends meet.
Conservative revenue projections: He underestimated his monthly income projections, planning for the worst while aiming for the best. It is keeping his spending disciplined and any extra revenue saved can be used strategically to grow the business.
Automated savings: A portion of every business sale will be automatically set aside for savings. That way, he never has to worry about emergencies because it will be already covered.
These steps will help my client keep his finances on track while growing his urban fashion brand into a profitable business in less than 18 months. The discipline being built in his first year will continue to help him manage his cash flow effectively as his business grows.
Conclusion: Prepare to Succeed, Not to Struggle
Budgeting and financial planning are more than just mundane administrative tasks; they are essential to a successful entrepreneurial journey. They enable you to progress from simply surviving in your first year to thriving in your business and making sound, strategic decisions.
If you've been struggling to figure out how to budget for your first year in business, keep in mind that taking risks without caution is not an option. It all comes down to making calculated decisions, setting realistic goals, and maintaining discipline.
Ready to take charge of your financial future? Subscribe to The Entrepreneur Spark Newsletter at www.smedigital.biz/blog for weekly insights on becoming an entrepreneur.
And don’t forget, I’m offering a free budgeting template to help you get started. Just click here to download the resource and kickstart your first year with confidence.
Remember, a successful business starts with a solid plan and I’m here to help you create that plan. Let’s take this journey together and make your entrepreneurial dream a successful reality.
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