If you’ve decided to start your own business, you may have drawn up a business plan, making some projections about how much you expect the new venture to earn and how long it will take until it breaks even.
What this information doesn’t tell you, however, is whether or not you’ll have to change your living standards to suit your new venture. It is a failing of a number of the free business plan templates available that the majority only skim over the personal expenses section of the financial planning. It’s all very well knowing that you’ll need extra funding after your first nine months of operation; but that is a lesser consideration if you need to sell a kidney to rescue your car from the mechanic two months after you start.
Preparing a personal budget that shows you exactly how much it costs to run your household is useful, because you can compare the costs of maintaining your lifestyle to the costs of running your business. It will enable you to get a better idea of not only how much funding you will need, but also whether you can afford to devote yourself wholly to the new business or if you’d be better off keeping your current job.
I’ve prepared a rough template for a budget, which is now available for free download. It obviously won’t suit everyone’s individual circumstances, so feel free to customise it to your own needs. Just a few things to bear in mind, however:
- These are your personal expenses. If there are expenses that you get reimbursed from your customers, or things that are only for business purposes, they should go into your cashflow forecast for your business plan instead. It can be difficult to make the distinction when you work for yourself, but persevere in the interests of clarity
- Overestimate your outgoings. You might not keep a receipt for everything, but don’t try to fool yourself into thinking that you’ve been living like a monk. Your bank balance knows better. If you’re not sure exactly how much you’ve spent, make sure your guesses are realistic, and that you revise them upwards if you can’t remember how many coffees you’ve been buying at Java
- If you have a regular expense that doesn’t fit into any of the categories given, make sure you add it and all other similar outgoings under the “Miscellaneous” category. Take care that you have not included them elewhere, though
Once you’ve complete the budget, examine your outgoings and compare them to your initial setup costs and the costs of running your new venture for the first year. Remember, if you have decided to work full-time on the new business, your funding will have to cover both the costs of running your home and the business. Also prepare for the unexpected: if you have to make a payment that you have not budgeted for, your costings could be thrown into havoc. It’s always a good idea to have at least three months’ household expenses in savings, just in case.
The personal budget isn’t set in stone, and naturally it can change as your circumstances do. But hopefully it will serve as a useful guide to what you and your new venture can afford. Starting a new business is tough enough; anything that gives you additional peace of mind has to be a bonus.
[Image by Jon Newman]