Hi Victoria here, author of Zest for Success, owner of The Bookkeeper Hub, and HBA Encompass. Back talking here in my car for the installment of building a business the Zest for Success way. Yesterday we had a chat about cash flow budgets and making sure that your business is viable. Today, I wanna take that a little further and talk about a capital budget.
Capital budget is how much money that you’re gonna need to actually start your business because you need to have that figure so you can work backwards to put the repayments in and to make sure your business is viable. So when we’re talking about a capital budget, it’s hard to determine what it is because it’s different based on every single type of business. So here’s my take on it and hopefully it will put you in a good stand going forward. It starts with any cost of materials that you need to buy to start up. Any stock that you need to buy. So yesterday we’re talking about manufacturing stubby coolers. You’ll probably find that if you wanna get them at $4 each there’s a minimum buy that you need to have a hundred or a thousand or whatever it is. So you need to work out what the cost of those stubby coolers are that you need to front up to get your first amount of stock. Now a hundred stubby coolers is a really small business. I’m just trying to make this as simple as I can. Keeping in mind that your suppliers won’t have dealt with you before, so they’re gonna want cash up front for you to order anything. So it’s really important that you understand what these costs are gonna be. If you’re going to go and rent some premises you’re gonna need to pay a rental bond which is generally worth four weeks rent in advance. And then, you’re gonna have to make sure that you’ve got enough to pay the rent each month going forward. When you sign a lease for property, the lease is there for three, four, or five years and if you cease being in business that we’re guaranteed for sure that you’re responsible for paying those lease payments even if you’re not there. Other things that you need to include in a capital budget are things like any machinery or tools that you might need. So a plumber might want to go and get a drying machine or some tools. I don’t know, fit out a van. All those kind of things need to be factored into your startup expenses. If you’re going to go into manufacturing there might be some machinery or some plant that you need to buy. And don’t forget the installation cost of these because just buying it from suppliers one thing, then you might need to get a sparky out to wire it up or some crane to move it into your business. So you need to have a think about all these costs and these don’t need to be accurate down to the nth cent. If you can get a rough idea of what it’s gonna be probably add about 10% for contingencies then you’ve got a capital budget. That gives you an idea of how much money that you need to start your business and just to throw out of left field one in there, I’m gonna put in there four months weight of operating costs. You know yesterday we talked about those fixed costs: the rent, the wages, the electricity, the telephone, the printing and stationery. All that kind of stuff if you know that’s gonna add up to 10 grand a month, I’m suggesting you need 40 grand up your sleeve just in case those sales that you think you’re gonna have don’t take off from day one. Because there’s nothing worse than operating for a month and then getting to the rent payment being due. And having to go and scramble and borrow money off mom, dad, and friends or whoever it is to pay the rent because you don’t want to borrow extra and you don’t want to look like a failure. It makes you feel bad so make sure when you’re looking at these capital costs that you’re looking at everything that you’re going to need to get your business up and running. Then you plug in the repayments of this whether it be you saying I wanna pay it off in eighteen months or whether the bank’s saying if you’re gonna buy a van it’s gonna be over four years. You make sure you have those expenses in your budget to make sure that in very short time your business is gonna be viable. You might find when you do your cash flow budget that you know that your sales are gonna be slow to start with and you are in the red for the first couple of months and that means then again that capital budget needs to be high enough to cover those expenses. So that’s why I’m saying to make sure that you’ve got a four month kind of leeway. Make sure you plug that into your budget. I had to think I’m just going to create a landing page on The Bookkeeper Hub website. It’s gonna be downloads. It’s gonna have resources. I’m gonna source a couple of easy budgets with some formulas in there and put it there so that if you want to download it and have a look at it it’s there.
The website can be accessed here and any downloads that we talked about Zest for Success stuff will be placed there so that you can find it nice and easily. So good luck with your budgets. If you have any questions, you can always email me [email protected]. So I’ll see you tomorrow.
