Entrepreneurs Need Budgets Too

Don't get trapped in the entrepreneur dream-land! Use a personal budget to bring yourself into the realm of financial reality so you can make sound business and financial choices that will help you create a successful business.

Written Jul 13, 2011, read 2571 times since then.

You’re considering starting a business, excellent! Your first step to becoming a business owner should be to create a budget; not a business budget, but a personal budget. You need a personal budget because it will ease the business building process by laying out the financial needs of you and your business. Part of starting a business is funding the venture and you should determine how much of that money can come out of your own pocket and how much, if any, you should get from loans or other sources.

When it comes to your business, guesstimating your available income that you can dedicate to your venture just won’t cut it. The best way to determine your own ability to pay for your business is to do an honest comprehensive cash flow breakdown by creating a personal budget.

When designing your budget, start with the current month and project your income and expenses at least six months into the business. Don’t forget to include an expense labeled “business savings,” which will be the catch all category for your business savings. Also, be sure to account for any income reductions that might occur once the business starts, and try to avoid projecting business profits into the budget because you want to work with solid numbers not guesses.

During the first draft of the budget, only include necessary expenses, ie. mortgage, food, loan payments, and leave out incidentals, such as clothing or entertainment expenses, so you can visually see the possible savings you could have if you cut back on these expenses. During subsequent drafts, add back in the incidentals that you can afford while still saving enough money for your business.

After you have created your budget, take a look at your “business savings” category and see how much money you can potentially save before you start your business and also how much you can save after the business becomes operable. The before amount will be your start up capital and the after will be your operating capital. By identifying these amounts you will be certain of the amount of capital you have to fund your business.

The next step is to determine if you have enough money to start your business, if you should save more before starting the business or if you should apply for a loan. You can determine the next action by creating your business plan, which will include a full cash flow projection, to find out if you have a capital deficit or surplus. If there is a surplus, congratulations, you can start your business! If there is a deficit, create a fast-track savings plan to make up the difference or seek out alternative funding sources.

This may sound like simple advice, but many entrepreneurs are so excited to start their business that they forget the financial piece. Financial reasons are a main part of why 8 out of 10 new businesses will fail in the first year. As new business owners, we have lofty goals and expect to “make it big” within the first few months of opening, but unfortunately that usually is not the case.

It often takes longer than expected to turn a profit and during that time a lot of money is spent trying to promote the business and find clients. If you head blindly into running your business, you risk running out of money before your business becomes profitable. Creating a personal budget acts as a wakeup call that will bring you back from the entrepreneur dream-land into the realm of financial reality so you can make sound business and financial choices that will help you create a successful business in the short and long term.

Learn more about the author, Staci Dennett.

Posted by Nadir Karim, Seattle, Washington | Jul 13, 2011

While I am not starting my own business I do appreciate the positive tone of your article. The key point of separating one's personal expenses from business expenses no matter how big ones business is important. Your right in knowing that successful start ups succeed in knowing where every single penny is going in their business and personal pocket book.
Posted by Kate Phillips, Seattle, Washington | Jul 14, 2011

Great advice, Staci! And I think what you are saying is not so much that your expenses must be separate, but that your personal budget - while technically "separate" - profoundly impacts your business finances.

I wrote an article on a similar topic with some examples of how personal overspending can sabotage your business at: http://biznik.com/articles/how-personal-spending-can-impact-your-business-and-your-life

The only thing I would add is that cashflow projections can be very dangerous... I believe that most entrepreneurs are overly optimistic. Though, on the other end, there is sometimes nothing like a little pressure to kick one's booty into gear, and I have seen business starters with lots of savings fail to get into gear until the real pressure is on. (Whether that happens or not depends on one's psychology.)
Posted by Staci Dennett, Seattle, Washington | Jul 14, 2011

Kate,

Thank you for your comment. I absolutely agree that cash flow projections can be overly optimistic, and it's imperative for a Business Plan to have realistic figures in order to be effective. I always follow the adage to overestimate your expenses and underestimate your income as a way to hedge against overspending and under earning.

And since entrepreneurs can lean toward the optimistic side, that's why hiring a money coach, like Kate, a business coach or a budget specialist can be so beneficial. These professionals can act as a neutral party not linked to an entrepreneur's lofty goals and they can help make realistic goals based on facts not dreams.

Kate, I really enjoyed reading your article. It ties in nicely with the need for budgeting when starting a business.
Posted by Douglas Snider, Mukilteo, Washington | Jul 14, 2011

Hi Staci! Your article is right on the money, pardon my pun.

Regards - Doug
Posted by Tracie Trevillyan, Vancouver, Washington | Jul 14, 2011

Spot on Staci! I don't know how many new business owners I've worked with have fallen into this trap.
Posted by Alyssa Magnotti, Redmond, Washington | Jul 14, 2011

Great post, Staci! Love what you have to say and there is so much truth in this post. Making sure to know your limits financially is a big part of having a successful business.
Posted by Lori Richardson, Portsmouth, New Hampshire | Jul 14, 2011

Staci, you are discussing an area of business building that many entrepreneurs who are going in 10 different directions often overlook.

The first three years of my business, I did not have a personal budget and it was so very difficult.

It is often the simple advice that we enthusiastic business owners can overlook. PS - you have a very nice style of writing - I hope to see more from you!

Corporate sales coach, author, fundraising auctioneer
Posted by Lynn Baldwin-Rhoades, Seattle, Washington | Jul 14, 2011

Staci, wow, way to go on this topic! I both nodded in agreement at parts and learned some new things, too.

You write, "As new business owners, we have lofty goals and expect to “make it big” within the first few months of opening, but unfortunately that usually is not the case."

Nope - it's not! It takes more than dreams and passion to bring in cold, hard cash, and for those of us on the entrepreneurial pathway, there's a steep learning curve. But it's so worth it when we stick it out, keep growing, find mentors, and learn from articles like yours.

Many thanks! : )
Posted by Kate Phillips, Seattle, Washington | Jul 14, 2011

Thanks Staci,

I'm glad you enjoyed the article. Thanks for bringing your expertise to the table in this article!

As entrepreneurs, we tend to be purely focused on our income, and pay WAY too little attention to the out-flow of money in our personal lives - which our business must support. You've brought something very valuable to our attention: budgeting is a skill that everyone needs, perhaps, especially small business owners!
Posted by Kirsten Clark, Bellevue, Washington | Jul 15, 2011

This is a good article and a reminder to plan ahead. I'm a huge fan of cash flow projections. Whether you're in the planning stages of starting a business or you already have a business, your cash flow projection will help you focus on how you plan to pay for your start up costs and your overhead expenses. Many business owners look at the bottom line of their P&L Statements and think that is the number they should base their plans on. I help my clients understand the importance of a cash flow projection and walk them through the process step by step. In fact I have a whole website devoted to just cash flow projections.
Posted by Nick Webb, Seattle, Washington | Jul 15, 2011

Well put article, spot on and with great style. I think I applied most of this when starting my business, but haven't heard it put some simply before.
Posted by Trelawney Goodell, Seattle, Washington | Jul 15, 2011

Great article, Staci! I think it will help many entrepreneurs start off with their eyes open about their finances.
Posted by Akuhwa Paul, Abuja, FCT Nigeria | Jul 26, 2011

Staci, This is a good and timely article. Indeed a budget is a precursor and blueprint of any business venture success/failure. Therefore, any entrepreneur that treats budgeting incidentally to business is not in one but in a process of efforts/time wasting.
Posted by Johnson Smith, London, London United Kingdom | Aug 04, 2011

A budget is needed by everyone and no one will be there who can ive without the budget Instant cash
Posted by Chas Wyatt, Gladstone, Oregon | Aug 07, 2011

Excellent article! The effects of personal finances are more likely to spill-over into the affairs of the small business owner, or solopreneur. Kind of like a wake on a lake, is more apt to tip a canoe, than a yacht. But, I guess if you had a yacht, you wouldn't be launching it in a lake- anyway, you get my point.