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7 steps to setting up a home business budget

by Chris Stirling

Every Home Business entrepreneur has the same goal - to earn money, it can be as little as $20 a month or as much a $1,000,000 a year. That being said, as with any business keeping track of incoming and outgoing cash is vital to the success or failure of your business.

At first, the costs of hiring an accountant to manage your cash flow or create a budget for your business may be a bit more than you are willing to take on. So to ensure you do not miss this very important aspect of starting your business let's go through the 7 steps to set up your budget that you need to take.

A Budget is nothing more than estimating costs and income. It is your task to review your budget from time to time and adjust it based on real numbers. The real numbers are the actuals you get from your business. The budget is the estimation of your costs and income. There are several applications on the market to perform the mentioned steps. I use and suggest you use Microsoft Excel

Step 1: Choose the time period of your budget that you are comfortable with, usually people choose weeks or months.

This means you need to calculate every cost to a weekly or monthly basis. For Example if your opt-in mail list costs are $120 a year, the monthly costs are $10 and the weekly costs are $2.31 per week ($120/52 weeks=$2.31)

Step 2: Make a complete list of all recurring costs you already know:

i.e. Web hosting, Residual Income Fees, your autoresponder, opt-in lead subscriptions and so on. Consult your credit card statements and search your Paypal account for subscription payments. Transform the costs to the unity of time you have chosen in Step 1 (i.e. monthly or weekly).

Step 3: Now make a list of all one time payments you plan to have this year, and calculate the accruals for the periodicity you have chosen in Step 1.

Example: you plan to buy Website building software for $300 this year (this is your Budget). You could calculate then a monthly costs of this software as $25 a month, or $5.79 per week. If you have purchased equipment (i.e. Hardware), you need to distribute the costs amount the life of the product. (i.e. one PC usually is used for three years.) If you pay $1000 as one time payment, you can distribute the costs over three years, giving $333.33 per year or $27.70 monthly, or $6.41 per week. This is called depreciation. If you know that after three years you may sell the PC for $200, calculate the depreciation accordingly, starting now from $800 ($1000-$200).

Add the costs obtained in Step 3 to the list you have already prepared in Step 2. Now you have the complete list of your estimated monthly or weekly costs.

Step 4: Now we come to the most exciting section: your Earnings!

Most of the internet marketing newbies would expect to be in positive cash flow after a very short period of time. This is unrealistic. As you have seen in the first steps of the calculation of your budget, you may consider hardware, literature, marketing and other costs that in the first few months without the corresponding earnings. Thus, it is absolutely normal that you may have a period where you are in negative cash flow for a while. Don't worry buy having a budget and sticking to it you have prepared for this situation until you reach your break-even point (earnings = costs).

But let's come back to the earnings. In internet marketing, your earnings are derived from sales. There are either direct sales or indirect sales from your downline, if you are running a network marketing business.

Here you will see that the estimations of earnings is obviously much more difficult than the estimation of your costs. Ideally, you may express your earnings as a percentage of your marketing spending. If your marketing effort is not able to produce sales, you may review it and look for other marketing strategies. If you have tracked your marketing spend properly, you may be in a good position to estimate your conversion rate (the percentage of your clicks that lead to sales) and thus, can express your earnings as a percentage of your marketing costs.

Example: If you are running a Campaign with ABC Search Engines to promote your business. You pay $0.05 per click and achieve 300 clicks a month. Your corresponding recurring costs of $15 a month are already considered in your budget.

Your conversion rate may be 1%, so you expect three sales per month. If you get $8 per sale, your monthly earnings are $24 a month. This means your profitability is 25% ($24-$15)/$15. For every advertising dollar you get $1.25 sales.

The total profitability of your business will be lower, since you need to consider the total cost and not only the ABC marketing cost.

The problem may consist that at the beginning you will not know the conversion rate of your campaign, so you will need to work with estimations. Once you have the real numbers, review your estimations based on that numbers. Your budget will get more and more accurate, the more data you can provide.

Step 5: Now you can build your budget based on costs and estimated earnings month by month.

You may decide to reinvest part of your earnings and increase your marketing spending month by month. (I strongly recommend this as this is the way to create momentum early in your business.)

It is now time to put all data into your Calculation Sheet. Start building columns, one column per period (week or month). Each period will have 2 columns, one for your budget and one for your actuals.

Divide your rows in "Earnings" and "Costs", subdivide them in several rows for your earnings (in the case you are working with multiple programs, reserve one row per program) and one row per each cost element identified in the steps 1 & 2.

At the bottom of each column create a sum, this will give you a total of your costs and earnings per period. Below the two sums create a cell that will calculate the earnings minus the costs - this will give you an accurate picture of where you stand financially each period. You will see immediately if you have positive or negative cash flow.

As already mentioned, it is absolutely normal that in your first months (or years?) you will have more costs then earnings. This is the case for every business. However you should be now in the position to forecast when your break-even point will be reached. You may decide to invest more in marketing activities if they seem to be profitable, or save costs by reducing your recurring expenses.

Step 6: Review your budget on a regular basis.

The more data you have, the more accurate your budget will get. Calculate period by period your conversion rate and monitor the results of your marketing activities. Update your budget as your figures become more accurate over time.

Step 7: Now run your business!

Your Budget is now a powerful instrument to give you a good financial basis if you are on track or not. Some people have the tendency to oversee spending and over estimate earnings. If you feed your budget with real data, it will give you an instant view of the results of your cash flow! All businesses need a budget, a good budget will keep you on track, and give you a clear understanding of what is working, what is not and where your money is going and coming from. Without a good budget it is easy to loose your business and not know why.

Chris Stirling is the owner of Stirls.com and His Internet Marketing website is designed to help other people achieve their goal of having their own work at home business. http://www.stirls.com

 

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