Make a budget

Start-up budget

In the beginning, you may need to make investments that are necessary to get your business off the ground. A start-up budget shows the costs you have in the very short term and your ability to finance them. The start-up budget includes the bills you need to pay at the start of your business.

Set the right price

When deciding what price to charge for your product or service, there are several factors to consider. You need to understand the cost of what you are selling and determine the margin required to make a profit. It is also important to research the market to understand what your customers are willing to pay and what your competitors charge for similar products or services.

The costs of your product or service can be devided into three parts:

• Labour costs: All of the work in the company may not be done directly with the product being produced, some time may be spent on administration or other work. When you calculate the labour cost for the product or service, you need to count the time that you actually work directly with the product or service in question.
• Material costs: If you don't know exactly how much material costs you have for each product or service, you can calculate the total annual cost of all the materials you use. Then you divide the annual cost by the number of products or services rendered that you can charge for during a year.
• Other costs: The company probably has other costs, which cannot be directly linked to the product or service. Such as rent and costs for cleaning, machinery, insurance and other things that are needed. You can add up the other costs per year to get a total.

After adding up your labour costs, material costs and other costs per year, you divide them by the number of products you produce or services you provide each year. Now you have worked out the manufacturing cost for each product or service.

If you want to learn more about pricing, Almi has information (mainly in Swedish) you can benefit from. Among other things, there is a film that is part of one of their online seminars. almi.se/en

Profit and loss budget

A profit and loss budget shows the expected profit or loss

A profit and loss budget summarises the company's expected revenues and expenses and the expected profit or loss for a given period, such as a year. The hardest part is figuring out sales volumes, i.e., how much you will earn. An established business can use previous years' sales and make some adjustments when budgeting revenue. It's not that simple in a new company. Budgeting sales volumes in a new company normally requires looking at several factors:

• what the products will cost
• the range of products and services your company will have and how much you expect to sell of different goods and services
• what customers the company will have
• what geographical markets the company will target
• what marketing the company plans to carry out during the year.

Several of the cost items in the profit and loss budget are directly affected by sales volumes, e.g., the cost of goods and personnel costs. Therefore, you should budget revenues before looking at costs.

After completing the profit and loss budget, you will know how much you must sell to cover your costs.

When preparing the profit and loss budget, consider each month's amount separately. This applies in particular to revenues and those costs that are directly linked to revenue, such as the cost of goods. In a business with seasonal fluctuations, it is particularly important that you prepare your profit and loss budget on a month-by-month basis, and not annually.

Budget management

Rather than being a reflection of reality, a budget is a financial plan with hopes and expectations. So don't get bogged down in the details - try to see the big picture. A well-considered and realistic budget shows the risks and opportunities facing the business. It also supports the achievement of the business's objectives.

Cash flow budget

The cash flow budget shows whether you can pay your bills

That your profit and loss budget indicates a profit is important, but it does not give the whole picture. Even if the final balance for the year is positive, cash shortages may arise during the year that leave no money to meet the company's expenses. This may occur when, for example, you have production costs but are not paid until the product is delivered.

A cash flow budget is drawn up to plan for this. While a profit and loss budget shows whether the business is making a profit, the cash flow budget shows whether there will be enough money to cover monthly expenses.

To avoid unpleasant surprises, you should always prepare a cash flow budget along with the profit and loss budget. Otherwise, a lack of liquidity might, in the worst case, bring down the whole company. Then it won’t matter how profitable the company is.

The profit and loss budget is sometimes done on an annual basis, but this is not enough when doing the cash flow budget. Whether you will have money in a year's time won’t matter if, after only four months, you go under due to a lack of liquidity. For that reason, you must prepare a cash flow budget on a monthly basis.