Related to your business plan, you should prepare a budget for your company, both when you’re getting started, and as an ongoing planning tool. At the beginning, you want to know how much you’ll need to invest to start your business. Once you’re up and running, you need to know how much revenue you’re bringing in so you can manage expenses. It will also tell you if you need to increase marketing to bring in new customers, or set money aside for a seasonal low period (e.g. a landscaping company will have less business over the winter).

Before you start your business, your budget will be an estimate, but you’ll be able to refine it as you get more experience under your belt. At a minimum, you should make a budget for each month before it starts. Down the road, you may also prepare a quarterly or annual budget for long-term planning.

View your budget through 2 lenses – when the revenue and expenses happen, and the cash flow timing. When you bill a customer, how long does it take before you’re paid? Which expenses do you have to pay in advance, such as insurance, and which can you pay after the fact, such as inventory you purchase? Try to keep a minimum amount of cash in the bank to avoid checks bouncing, and giving a cushion for delayed payments from customers, or unexpected expenses. An ideal “emergency fund” is 3-6 months’ worth of expenses. This will take some time to build up, but is an important cushion against adverse business conditions.

Related to cash flow, make sure you set aside money for income taxes each month, preferably in a separate bank account so you don’t lose track of it, or accidentally spend some of it. For small businesses, approximately 25% of net income will get you close to the amount you’ll owe for taxes. A CPA can help review your individual situation and determine if you should set aside more or less.

Revenue will be based on the volume of sales – whether inventory being sold, billable hours being worked, deliverables being finished, etc. How you forecast revenue will be based on what you’re selling. How many inventory items or billable hours do you plan to deliver? If you’ve been open longer than a year, how much do you typically sell this time of year? If you bill for completed deliverables, e.g. consulting or construction projects, which deliverables will you finish and bill customers for? Consider whether you’ll collect all of your sales; you can either estimate a percentage that you won’t collect, or predict whether certain customers will delay payment or be unable to pay.

Expenses fall into 3 categories – startup costs, variable expenses, and fixed expenses. Startup costs will center around incorporating your business, any licenses and permits you need, deposits for insurance and rented facilities, etc. Depending on your business, you may need equipment, furniture, or initial inventory. If the startup costs are high, is there anything you could negotiate to get for free, or borrow, or barter goods or services for? Consider if a friend or colleague would be able to help you or if you can negotiate with a local business or service provider. Do you have anything you could sell, to fund startup costs? Can you get your customers to pay deposits for services, or pay in advance for products they’re ordering? You could use the advance payments to cover inventory and other costs.

Variable expenses fluctuate based on your volume of sales. If you’re selling products, this might include the cost of inventory, production or manufacturing costs, shipping items to customers, per-transaction credit card fees, and commissions on sales (e.g. to in-house sales people or affiliates who help you market your products).

Fixed costs will be the same amount, regardless of sales volume, things like rent, utilities, phones, equipment lease payments, office supplies, dues and subscriptions, advertising and marketing, and the costs of your website.

Staff and consultants are generally fixed costs, but can be variable in some cases. If you have to pay overtime when production is high, or if you have staff or consultants that only work the hours you need them for, that would be a variable cost. For service-based businesses, calculate hourly or daily rates for staff and/or consultants you use, including employee benefits and overhead, to make sure you bill high enough rates to your customers to cover your costs and make a profit.

For long-term planning, you may also want a capital budget to plan for large purchases, such as equipment, vehicles, an office building, etc. Figuring out how much they’ll cost and when you’ll need them will help you set money aside over months or years so you’ll be able to buy them when you need them.

Your first budget may be challenging, especially if you’re just getting started and aren’t sure what your revenue and expenses will be. Every time you make one, it will get a little easier, since you’ll have data from previous months to base it on, and eventually full years’ worth of data to show any seasonal fluctuations. Don’t lose heart – the practice of budgeting will make your business stronger since you’ll be able to plan better for the future and manage your money better.