If you are trying to build a sustainable business, you already know that you have to be working with some sort of budget. You cannot just make sales and spend money without some sort of money-plans. The budget is your money plan, detailing how much of your funds (seed funds or revenue) should be allotted to different costs.
A budget structure means having this spelt in percentage terms instead of actual amounts. So instead of saying that you will spend $100 on marketing promotions this month, you can simply state that you will spend 10% of the previous month revenue on marketing. In this way, you understand that if you want to spend more on the different items, you have to make more or get some extra funds to inject.
Having a budget structure helps you in different ways.
- It saves you the stress of racking your head month after month to determine how much to spend on marketing or on remuneration.
- It helps you keep spending in check, so that you do not start spending money you have not made.
- A budget structure is a core part of building a business structure and a sustainable business that can operate in your absence.
Even if your business does not become profitable in the first year, that is no reason to have a poor structure. Now to the issue of what your business budget should look like. The suggestions here are ranges. Yours could be slightly higher or lower, depending on the industry or country your business is operating, whether it is a full-time business or side-gig for you, how many employees you have and so on.
This is about the most important business cost that should be present in your budget. If you do not have a product after all, what would you be selling? Even for service-based businesses, your service is your product. Everything that goes into building the product should come under product costs.
For product-based businesses, this would include the cost of sourcing and purchasing raw material, cost of the manufacturing process, packaging, labels and any other thing that has to do with the product itself.
For service-based businesses, the costs could include rental or maintenance fees for your materials and tools, subscriptions, etc. for instance, a photography business would have product costs like maintenance or rental of the camera or photography tools. It could also include subscription fees for the software or application you use to edit and save the work etc.
The fact is that every business has product costs, even if there is no physical product. You just have to figure it out for yourself.
How much should you spend on product costs?
A practical range should be from 25 – 35%. This leaves you with sufficient funds to take care of other bills.
Team & Manpower costs
Now, this is a cost that is common to all kinds of businesses, even if you are the only staff your business has. This refers to remuneration, welfare, and whatever else it costs you to maintain the team that keeps the business running. It could be monthly salaries, wages and benefits, payroll taxes, workers’ compensation and insurance, outsourcing fees for those tasks you outsource, consultation fees (for the times you bring in the experts), and so on.
Your team and manpower costs can range from 14%–30%, also depending on the size of the team and how much manpower is needed to keep it running.
Marketing & sales costs
Once you have a product ready, you have to get it in front of the customer to make sales, and when a sale is made, you also have to execute it.
Everything you spend to market your product and execute sales should come under marketing and sales costs. From promotions and advertising to packaging, shipping, shipping insurance, warehousing, marketing materials, advertising, public relations, lead acquisition, etc, there should be provisions for everything it takes to get and execute a sale.
The recommended range for this usually should not go above 20%. Research shows that businesses that spend more than this on marketing and sales are less profitable than those who spend less.
What are the costs it takes to keep your business running daily? From the very obvious bills like electricity, and internet access, to the not-so-obvious bills like maintenance and utility bills, everything should be factored in.
Overall, your operations costs should stay within 10 to 15% of your total budget.
Very close to the operations costs, we have technology costs. Most businesses these days will find that they are using some form of technology or the other, and it comes with bills attached to it. Not all of these bills can be classified under operations. For instance, Computer hardware, computer software, printers, cell phones, PDAs, website development and maintenance servers, security measures, etc.
There are administrative costs involved in running a business as well. Things like business insurance, purchase of office supplies and stationeries, parking space and rent, express shipping and postage fees, fees and government approvals, travels for meetings and networking events etc. This cost largely depends on the size of your business and how lean your business model operates. Not every business will need filing cabinets, desks or a photocopier.
This is one cost that may be left to range between 5 to 10%. Again, this is largely going to be influenced by your industry and location of operation.
Every good budget should allow room for some flexibility and this is the reason provision is made for miscellaneous costs. This covers for unforeseen bills and demands, not expenses that you forgot to factor into your budget. If your budget process is thorough, 3 to 8% should suffice as provisions for miscellaneous costs.
There are costs that may be peculiar to businesses based on their mode of operation. For instance, there is data to suggest that businesses that operate entirely online may have to factor in about 9 to 10% of their budget for online costs (which may not apply to businesses operating offline). Similarly there may be a 9 to 12% budget provision for specific offline costs, which may not apply to online businesses.
Plan your money. It is great to make sales after sales every day, but you should also consciously have a budget that determines what you spend on your business. The categories listed above are general groupings, but you can list out the specific costs involved in running your business and see where they fit exactly. This will come in handy when you begin to fundraise and make financial predictions for your business. That way, when you stand before an investor and you are asked, “How much have you spent so far on marketing and sales?” you will not be caught off-guard.