Sticking to a budget is always advised, but never more so than right at your business’s start when expectations are uncertain, money’s tight, and you’re charging into the unknown. By thinking ahead – and adhering to the budget you create – your IT startup stands a good chance of succeeding.
With that in mind, here are tips on how to create a budget when starting an IT business.
Consider Your Known Expenses
Take into account all the necessary expenses for your business. These might include fixed costs, which remain fairly steady whether your sales rise or fall. Fixed costs include…
You may also have variable or semi-variable costs, which are influenced by the volume of your business. These could change week to week or quarter to quarter, and include expenses such as…
- Production supplies or raw materials.
- Income tax.
- Wages (for hourly employees or contractors).
- Salaries (which may change or remain fixed, depending on how fast you grow and hire).
Focus Only on Essential Costs
“Don’t spend money unless it is absolutely necessary to achieve your goal,” says
Christian Brim, a
small-business advisor and accountant with
Core Business and Financial Services
(@COREBIZUS) and co-founder of Core Employee Solutions (@MyEmpSolution).
“Focus is critical!” he says. “In other words, you don’t need coffee service and snack delivery. Spend every dollar as if it was your last.”
Brim also recommends avoiding employing anyone for as long as possible, at least until you’ve proven you can make enough money for it. “Hiring people is the quickest way to run out of money and run into compliance problems,” he says. “Outsource everything that is not a core activity.”
Plan for Unknown Expenses
Your business is going to face a few surprises after launch.
“I always pad a startup with an extra $3-5k in extra expenses that have not yet been identified,” says Brim. “Every situation is different, but things you haven’t thought of or didn’t know were needed do come up.”
A surprise could be as simple as needing to:
- Buy a new computer or licensing new software.
- Travel more than usual to meet with a client.
- Purchase more supplies than you thought were needed.
The point is, you’re not going to be able to plan for everything, but you can have the money for it.
Consider Your Revenue
The goal here is obvious, but worth stating: make sure you’re bringing in enough revenue to cover all your expenses. Your revenue can include…
- Sales – the money clients pay to purchase your services and products.
- Royalties, interest on investments, and licensing fees (although these won’t usually be a factor until your business has been established for a while).
The important thing is to be realistic.
“Entrepreneurs are optimistic, or they wouldn’t start a business! That said, the optimism can translate into unrealistic expectations,” says Brim. “The old guideline of ‘it will take you twice as long and cost twice as much’ is anecdotal, but it is still a good guideline.”
Be conservative in your estimate of what you’ll make, at least at first. You’ll have a much better idea of how to budget for your revenue once you’ve had a year or two of experience to go by.
Review Your Budget with Others
“Have an accountant, another business owner, and someone in the industry review [your budget] and ask questions,” says Brim. “By having to justify the budget, you will gain amazing focus.”
Get feedback on what you’re charging, how much you’re spending for what you think are necessary expenses, and where you can cut down on costs.
Keep in mind that startup budgets are always wrong at some level, says Brim. Still, don’t neglect doing it.
“Preparing a detailed budget for 24 months forces you to really understand what it is you’re trying to accomplish as a business, and remove some of the ‘things you don’t know you don’t know,’” says Brim.
One way to get a head start on your budget? See how much technology business insurance costs.