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Start-Up Budget: Definition & Example

Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will define a start-up budget. An example budget will be included and explored, along with a list of items to remember when building the budget.

Definition

There are numerous costs to take into consideration prior to establishing a business, and without the appropriate research, many items can be inadvertently left out. Prior to receiving funding for a loan from a bank or investor, it's common for parties interested in investing or loaning money to you and your new business to request an itemized list of income and expenses during an initial period.

A start-up budget is an itemized list of income and expenses for a new business, which often covers the period up to commencing operations and perhaps a small amount of time after operations have commenced.

Example

Think of it this way: your friend has approached you to loan them $5,000, since they're going to start a business that specializes in developing apps for smartphones. Before writing a check for $5,000 to your friend and your friend's business, you would certainly like to know his start-up costs and how he's going to make money in the future, right? You would like to see your friend's start-up budget to know you have a good chance of getting your money back, hopefully with interest.

You request this list from your friend. Although you are the first potential lender he has approached, he is one step ahead of you. He knows if he is to get the $20,000 he requires to begin the business, he needs to present this list of income and expenses to you prior to you writing him a check.

He hands you this start-up budget for his first 90 days. During those first 90 days, he doesn't anticipate any fees other than what is shown on his budget, since he's working out of his home.

Sample Start-Up Budget
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After 90 days, he expects the app to be ready for sale. Are you prepared to give him the loan? He's offering to pay you $250 for your share of the loans as interest. One thing to keep in mind is that all of the income that he will receive is also a liability to him and the business that will have to be paid back. Hopefully, after the app is listed, he can pay back the $20,000 in loans.

Furthermore, how is he going to cover the expected $6,000 shortfall during the first 90 days? Is he paying those expenses from a loan from himself to the business? If the app only sells $6,000, who is paid, and in what order? Is his $6,000 paid back first, with nothing remaining to go to the other lenders? These are all items that should be discussed and agreed upon prior to becoming a lender or investor in a start-up business.

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