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Financing
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By means of budgets it is possible to calculate your specific capital requirement related to setting up and running a business.
Budgets are tools you need in order to figure out your business establishing and operating capital requirement. Basically, you need four budgets:
1. Personal Budget
A personal budget is applied to calculate how much money you must withdraw from your business to fund your personal expenses. I.e. how big a “salary” will you be able to withdraw from the business. In this context “salary” is to be deducted from the company’s profit which is the entrepreneur’s “pay provider” once the business is running.
2. Establishing Budget
In order to estimate necessary and suitable costs prior to start-up, you must work out an establishing budget.
The establishing budget provides an overview of expenses incurring up until business start after which you will be able to gain an income.
3. Operating Budget
The operating budget provides an overview of the costs of running your business. In other words, the operating budget gives you an overview of the company’s day-to-day expenses and a chance to calculate an estimated turnover.
4. Cash Budget
In order to figure out your need of cash – also referred to as the capital requirement – you need to work out a cash budget.
A cash budget is a chronological overview of expected incomings and outgoings over a given period of time.
Among other things, a cash budget shows a company’s cash flow and thus the capital requirement to keep the business in operation.
Typically, an accountant or a banker calculates your capital requirement.
Other budgets
Besides using budgets to calculate capital requirement it is also expedient to make budgets to foresee financial effects from the start-up as well as the operation.
You can make an “optimistic” budget – i.e. a budget in which the start is estimated to be better than anticipated - you gain a turnover/sales exceeding your expectations.
Likewise, a “pessimistic” budget takes a slower than anticipated start-up phase into account.
In both cases it is interesting to look in detail at the effects on cash flow, capacity, physical frames of the business as well as other areas affected by changes in the expected position.
Alternative Budgets
By making various alternative budgets you will, to a larger extent, be able to control the financial development of your company.
You can constantly monitor if things go as planned, whether you are over or under the budgets you have worked out. Thus, you get a warning to act, make decisions or take new initiatives in response to the new financial situation.
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