Making a Family Budget

Before you start planning for the cash needs of your new business, you must determine how much cash you will need to survive. You have to plan cash needs during the startup and first few months of your new business. It would be nice to think that your business will be profitable from the day you open the doors, but that's not realistic.

The best way to start is to prepare a family budget schedule that shows where you spent your money in the last 12 months. It is advisable to use a monthly family budget schedule because expenses will fluctuate greatly from month to month. For example, if you have children in private school or college and the tuition is due twice a year, then those months will require additional cash.

In your family budget schedule, include all the expenses that you have incurred on a monthly basis. These expenses range from home mortgage payments to vacations to doctor bills. When preparing the schedule, keep in mind the expenses that could be reduced or eliminated if needed.

ncluded among the Business Tools is a family monthly budget sheet. This worksheet is an Excel 5.0 template. Because it's a template, you can use the worksheet over and over again and still retain an original copy of it.

The worksheet is set up to be used for projecting your family monthly budget schedule for 12 individual months. We've formatted the worksheet and put in most of the income and expense descriptions. All you have to do is put in your numbers and print it.

Once you've downloaded the worksheet, feel free to modify it to fit your own needs.

Let's go through the abbreviated monthly family budget schedule provided below. First, a couple of assumptions: the husband will be the one starting the new business and quitting his current job, and the wife will continue earning a comparable wage.

In January this family would be able to live on just the wife's wage and other income. But, looking at February, this family would be short by $525 for the month. When you go through your monthly analysis, you will probably find that in some months you have extra cash, while in others you will be short of cash. If the month that you are short is the result of some unexpected bill, like a major repair on the car, exclude that amount when you are trying to determine income needs for the new business. You should always have an emergency fund for these types of expenses. If the extra bill is to pay for school tuition, budget for this so that you have the money when needed. If the extra expense was for a long vacation, you need to determine your cash priorities. If every year you think you need to spend that money on a vacation, then include it in your budget; if this was a one-time vacation, then exclude it in planning your future budget.

As this condensed budget shows, this family would be a little short in the annual total. With a few discretionary cuts, they would be able to live on the one wage income while the new business is being started and until it is profitable.

Monthly Family Budget Schedule
Description	January	February, etc.	Annual Total
Wife's wages	$3,500	$3,500	$42,000
Husband's wages	$2,000	$2,000	$24,000
Other income	$100	$75	$1,800
Total income	$5,600	$5,575	$67,800
Rent	$600	$600	$7,200
Other expenses	$3,000	$5,500	$37,800
Total expenses	$3,600	$6,100	$45,000
Monthly extra
(Short) cash	$2,000	($525)	$22,800

Now go back to the monthly family budget schedule and make changes that reflect the opening of the new business. For instance, make the husband's wage zero and compute the amount of income needed to live.

After you have determined what income you will need to support yourself and family during the development of your new business, what comes next? How long are you willing to go with a loss in your new business? How long are you willing to be just scraping by and have only enough to pay the business expenses? Finally, how much income do you want to make in your new business? At this point you should have the goal in mind (and written down) that can answer these questions.

Potential new business owners should consider a one- to three-year plan for family survival, at a minimum. Lack of staying power, especially in small businesses that may not generate enough cash to live on for a year or two, is one of the reasons that small businesses fail.

If your goal is to make $50,000 per year, you will need to determine whether your new business is capable of generating that much income in its present form. See our discussion of managing your cash flow for more information.

Profitability Assessment

One of the most common reasons small businesses fail is that the owners underestimate how much money they will need to start the business. It always seems to cost more than they thought. Have you ever heard the old adage about planning a trip from the U.S. to Europe: Plan what you should wear and how much it will cost, then halve the clothes and double the money. Perhaps we need a similar adage about starting a small business.

In the Business Tools area is a checklist of everything you'll need to consider when figuring out how much money you'll need to start a new business.

The lesson to be learned from the many small business failures is that you need to be extremely careful when determining how much money you need to start your new business. Don't fall into the "rosy forecast" trap in which the new owner over-optimistically predicts robust sales in the first year and, as a result, doesn't have enough money on hand when the cash flow dries up.

Work Smart

When you estimate how much you'll need, either build in some cushion by padding the numbers or go back and change your estimates every time something costs more than you thought.

For example, a lot of small business owners who limit their advertising to the Yellow Pages will estimate their advertising costs as the cost of placing an ad. But when they actually take out the ad, they'll decide instead to place it under three categories rather than one.

Although the difference may only be $30 to $40 a month, the numbers really add up and the planning gets completely skewed when the owner decides to make similar changes in several different areas.

For a complete picture of how you can determine what it will cost you to start a new business, consider the following:

• Making a family budget— a look at your family's fixed and variable living expenses. It's important to know the amount of personal costs that you'll have to cover during the startup phase of your business.
• Costs of setting up the business— a look at the costs associated with forming the new business, including a complete rundown of everything you need to consider before you start your business.
• Costs of running the business— a look at the costs associated with operating the business, including some advice on how to estimate how much you'll need to keep your business going.
• Cash flow peaks and valleys— a look at the costs associated with uneven cash flows and seasonal businesses and how to plan for them.
• Wearing the parachute— a look at some ways to limit your costs, and to cushion your fall if things don't go as well as expected.

Market Assessment

One of the first steps in examining your business idea is to do some research to get to know more about your market. Presumably you already know that a market exists for your product. If you have an idea for a business but you're not sure whether a market for it exists or is big enough to support your business, you are getting ahead of yourself. If that description applies to you, you'll need to take a step back and look at finding the right small business for you.

For those who believe that a market exists, but who want to know more about the size and shape of the market in order to forecast their chances for success, research is the best place to start. Researching your market to know more about your customers and your competitors is a critical step for small business owners. If Procter & Gamble puts out a product that doesn't sell, they move on to the next idea. If you put out a product that doesn't sell, you're out of business.

When you conduct research, you'll want to find out the following:

• Who are your likely customers? Will who they are affect where you need to be (for example, if students are your customers, you may need to be near schools)?
• How can you reach your customers? Which marketing options will reach the most customers at the lowest cost?
• How much will they pay for your product or service? Are you planning to charge too much for your product or service? Are you planning to charge too little?
• Who are your competitors? Have you also considered those who aren't direct competitors but who might nevertheless compete against you (for example, if you sell an online magazine, you're competing not just against other online magazines but against other products that occupy someone's leisure time)?
• How will be you be positioned in the marketplace? Will you compete with existing businesses head on or will you try to find a special niche?

For a more complete analysis of how to assess your market, see our discussion of the following:

• Analyzing the market environment will help you analyze your competitors and develop competitive strategies.
• Market research on a budget will help you locate and target your potential customers.
• Business planning will help you develop the marketing portion of your business plan.