One of the most important things about starting a business is creating your budget and understanding your profit. While there will be challenges and unexpected turns in your journey as a business owner, you can avoid surprises and keep your business financially healthy by building a budget that fits your goals while keeping track of your spending.
Creating a sample budget can give you a general idea of what expectations to have for your business’s first few months or years. As your business grows, you’ll use this as a basis for your budgeting plans and create a more concise idea of your spending and expenses. We’re going to be giving a preview of what you should include in your budgeting plans for success in your company.
The best way to start is to focus on what you’ll be spending. Create a list of things your business will need, like materials, software programs, and staffing. Include items that will be involved in your day-to-day work, from office supplies to the thread on your machine if you’re creating an apparel shop. We recommend looking online and using your favorite search engine by researching examples of budgets in your industry. These can be layouts that will help you build your own. Let’s review the type of expenses your company can obtain.
Think of these expenses as those big-ticket items that are more of an investment than a purchase. Your machine, for example, if you were to purchase a RICOH Ri 100, would count as a one-time expense. One-time expenses can also include laptops, office furniture, and services for your logo or website creation.
These costs are to be expected each month in your budget planning. Think of what rent you pay, insurance, services, website hosting, and subscriptions. Keep in mind that fixed expenses vary little in price.
Here you’ll find those spending pieces that fall somewhere between a one time-expense and a fixed expense. They occur more than once but can vary in amount and payment dates. These expenses include materials you use to make your products, marketing costs, travel, accountant to file taxes, and credit payments.
Finding the sweet spot in pricing your product is vital in your budgeting. Keeping certain factors in mind will assist you in creating a price that is true to your work but still allows your company to flourish and be profitable.
Cost of Goods
Think of what costs are going into your merchandise. For example, if you’re creating an apparel shop, keep track of spending for t-shirts, threads, ink, bobbins, and more. In addition, whatever supplies you’re using to develop your product should be added to the cost of goods.
Do you have a team for your company? Are you paying yourself correctly? Include their fees or salaries into your cost of goods. Understanding that this involves yourself and keeping track of the hours and work you put into your own company will ensure that you’re pricing your products correctly to pay yourself back for labor. In addition, giving yourself a livable hourly wage will give you an idea of how your company is prospering and give you a nudge on when it can be time to bring others on board.
Packaging and Shipping
When you’re shipping your products to customers, your shipping can be seen as a view into your brand. When creating your packaging and how you want to present your products, factor in the costs for shipping materials, any goodies or filler placed inside, and marketing items like business cards or flyers.
Shipping is a crucial point to being on top of your industry. Failing to estimate costs correctly can throw off your budgeting and disrupt your cash flow. Focus on standard shipping prices for your products (size, weight, location, and speed.) One of the best ways to plan your shipping cost is by visiting your local post office for assistance on rates.
Remember to keep in mind how you plan to ship and the timing. While many customers expect next-day shipping, small shops shipping every day can be more costly than planned large shipments.
Online shoppers will expect shipping charges, but try to keep this reasonable. One of the top reasons many will leave their cart unpurchased from an online shop is exponential charges in the shipping cost.
Processing Fees and Credit Card Sales
Selling online means customers will pay through cash services, like debit or PayPal, while others will use their credit cards. When setting up your shop, note the processing fees that follow credit card usage. You will likely be paying a fixed processing fee per transaction and an additional fee of around 3% of the order price. However, this can vary depending on what processing service you use for your shop. For example, processing fees are higher when selling internationally, resulting in higher costs.
Damages and Returns
While we never hope our packages get damaged, it’s best to be prepared. Set aside a budget that can be used for emergency products that may have been damaged on the way to a customer. Research your product and see what’s standard for profit loss with damaged returns on your product type. Keep in mind the re-shipping cost that will follow as well. It’s essential to focus on your shipping methods for this reason and find the best way to ship your products if they’re at a higher chance of being damaged, like glass items.
When it comes to returns, you do have the option as a shop owner not to accept them. Shops that are focused on artisan sales, for example, might choose to be final sale shops. However, if you do choose to accept returns, keep these options in mind:
- A separate charge for a “restocking fee” to recoup some of the loss.
- If you feel you get returns often, which e-commerce sites are more likely to receive than in-person shops, you can raise your prices slightly to account for losses from those returns.
- You can also leave your prices the same and trust this policy will allow more sales to generate due to those finding comfort in the option to return an item.
When it comes to projecting your sales, you’re working on educated guesses from research or experience if you’re upgrading from what was once a side gig. Whether you’re going off based on your initial sales data from the side gig or starting from scratch, seeing the numbers can give you a better idea of what products to focus on and when to expect higher or lower sales rates.
For those who find themselves with no data to start with, we recommend reaching out to those in the industry you’re entering that you may know or contacting your accountant who might have contact with those in the business. Starting your own company is based on constant research and finding the right people to work with you and get you where you need to be.
How to Calculate Your Profit
First Step: to calculate profit, take your total revenue and subtract the cost of goods sold. The difference is your gross profit.
- Revenue – Cost of Goods Sold = Gross Profit
For example, if you sold $10,000 in printed canvas tote bags and the bags themselves cost you $3,000 wholesale, your gross profit would be $7,000.
- Revenue: $10,000
- Cost of Goods Sold -$3,000
- Gross Profit: $7,000
There are other expenses beyond buying the t-shirts, like the cost for your e-commerce website and your ads running on Google. These expenses are called operating expenses, which are subtracted from your gross profit.
Operating expenses include most costs that don’t directly connect to what you sell—things like rent, equipment, payroll, and marketing.
Second Step: subtract those operating expenses from gross profit. The difference is net profit.
- Gross Profit – Operating Expenses = Net Profit
For example, following off where we left off above:
- Revenue: $10,000
- Cost of Goods Sold: -$3,000
- Gross profit: $7,000
- Operating Expenses: -$1,000
- Net profit: $6,000
Now, if your net profit totals as a positive number, you’ve made money. If it’s a negative number, you’ve lost money. By following along with your profit calculator, you can start to see what costs might need to be reviewed and plan if you need to change your prices or other costs like shipping.
While we’ve gone over the basis for most companies, your costs will be dependent on your company. Some fees to keep in mind when creating your budget are debt repayment, Equipment payments, Taxes, and money received.
Debt repayment and Equipment payment are contingent on your company and what debt you’ve entered. This can be from payment plans on machinery to owning a storefront and mortgage. Keep these things in mind when creating your expenses budget.
All companies have to pay taxes at the end of the year. So make sure to factor this in when creating your budgets so that you’re able to cover your tax payments come the season.
Money received is meant to focus on what cash payments you’ve attained. So while on paper, your sales can show $100,000, unless you’ve fully received these payments from customers, you’ll have a hard time paying your expenses when the time comes. Also, be aware that if you hold inventory for your shop, all those products have value and get included on your income statement.
Whether your company is just beginning, or you’re transcending to a higher level and want to upgrade your company, creating your budget is the first stepping stone to success. You can have the best product and equipment, but you can find yourself in dire financial health if you don’t prepare your finances correctly.
Knowing how to manage and track your budgets, spending, and earnings can help you create a strong base for your business. The more you learn to control your money, the better success you’ll see in the long run!