In its simplest form, a budget is a breakdown of how you plan to use your money to cover your food startup business costs. It allows you to understand how much and where you will need to invest so that you do not run out of your funds too quickly.
In this guide, we will walk through how to successfully build a budget for launch in seven (relatively) easy steps.
You can use a good old fashioned pen and paper, a spreadsheet, or an online accounting software like Quickbooks to establish your pre-launch budget.
Notebook + Pen: This least-expensive option. It doesn't require a computer or the additional software. You can easily carry it with you and access it at any time, and electronic failure won't cause you to lose your data. However, notebooks can be misplaced, and meticulous record keeping can be ruined by the swift tip of a nearby glass of water. Perhaps most importantly, it's easier to make mistakes by hand, and it's more difficult to track your long-term spending and savings patterns with a notebook.
Spreadsheet: If you have a computer, you can set up Google Sheets, a spreadsheet program, for free under their personal user option. If you use a spreadsheet to track your income and expenses, you're less likely to make mistakes, and you can easily do calculations like how much you spent on ingredients for the entire year. In addition, a spreadsheet can keep a running total of how much money you have left to spend in a particular month.
Online Software: Online accounting software programs like Zero and Quickbooks are the most comprehensive and robust in their capabilities. They are set up specifically to help you manage your bookkeeping. This includes setting up your initial budget and tracking against that budget. Quickbooks, in particular, has an extensive resource center with tutorials on just about anything you can imagine in the world of bookkeeping!
Depending on your starting budget, we recommend either a spreadsheet or signing up for Quickbooks Simple Start. You will need to transition fully to an online accounting software once you have launched a product. A spreadsheet will get messy quickly.
Now that you know what tool you will use to create your budget, we will focus on what one time purchases you need to make prior to launch. These are top priority expenses that you absolutely need to get the business up and running. Some examples include:
Laptop: You need a computer to run to your business from sending emails to managing your online store and engaging with customers. You can purchase a Chrome book for less than $300 to get started. You will ultimately need something more powerful but this works for basic business tasks when you are first starting.
Company Formation fees: When you form your business entity, you will have to pay set-up and filing fees. For most LLC businesses, this typically lands somewhere between $200 to $500. The specific fees and requirements will vary depending on the structure of your business and the state in which you are incorporating.
Food Business Licensing fees: In addition to forming your business entity, all food businesses need a license to sell from the local health department, FDA, and other local and federal agencies. Again, this will usually be a few hundred dollars when all is said and done but varies state by state.
Brand Logo and Design: This is the fun part! You will need a logo and packaging design. While design can change over time, this is not a regularly occurring expense and can be listed as a one time expense when first drafting your pre-launch budget.
Fixed expenses are expenses that mostly remain the same month over month. They do not change dramatically with changes in your sales volumes or production levels. The next step in budgeting is creating a list of your expected fixed costs once you’ve launched. Particularly when first starting out, your fixed expenses will represent a very high percentage of your gross sales. Some examples of fixed expenses include:
Website hosting and building platform (such as Shopify or Squarespace)
Rent and facility management
Business insurance
Internet and/or phone service
Bank fees
Variable expenses are the opposite of fixed. They include any expenses that change based on the amount you make. For example, you will need to buy more ingredients if you make more products. This increases the total amount of capital you are spending on ingredients. In food business, this generally represents:
Packaging
Labor (*this does not include any salaries / labor here refers to the labor costs of manufacturing the product)
Ingredients
Shipping costs
*Of note, while these are variable costs, particularly with packaging, you will need to buy large quantities prior to launch.
At this point, you should have a list of your one time purchases, your expected monthly fixed expenses, and your variable expenses. It’s time to put numbers to each of these items.
One-Time Non-Recurring: This is the easiest to calculate. List the estimated cost of each individual item and then tally it all together. Save this number for later. We will come back to it shortly.
Fixed Expenses: On average, Union Kitchen Accelerator Members launch a product in market in about four months. Your fixed expenses should represent a minimum of four months in your pre-launch budget. If you think it might take you longer, add in additional months of fixed expenses.
Variable Expenses: This is the most complicated to estimate since, as the name tells us, these are variable and will be based on sales levels. During the four months leading up to launch, you will not have sales. This means, all of your variable expenses are tied to what you need to buy upfront to manufacture the product and then sell in market once you have launched. For the purpose of building a budget, assume that you want to enter the market with the ability to have one-month worth of product inventory.
We are armed with our total one-time non-recurring purchases, our fixed expenses, and our variable expenses. Assuming it will take four months to get a product launched, we now need to sort and organize the above expenses by month since all these purchases will not happen at the exact same time.
One-Time Non-Recurring: When are you buying what?
Fixed Expenses: Include the monthly total under each of month. These are monthly bills you will need to pay.
Variable Expenses: Packaging will be your first purchase as it takes the longest to arrive. Conversely, labor will be last since it will not be an expense until you are actually making the product. Don’t worry about getting this exactly right. The key is that you have enough earmarked to cover the expenses when they do come up.
Ready for some math? Now that you have created an estimated list by month of all of your pre-launch expenses, tally it up:
Month #1 Total = (One Time) + (Monthly Fixed) + (Variable Expenses)
Month #2 Total = (One Time) + (Monthly Fixed) + (Variable Expenses)
Month #3 Total = (One Time) + (Monthly Fixed) + (Variable Expenses)
Month #4 Total = (One Time) + (Monthly Fixed) + (Variable Expenses)
….Drum roll please! Now that we know the monthly totals, add it all together to get your final estimated financial needs to launch a product into market.
Total Capital Needed = (Month 1) + (Month 2) + (Month 3) + (Month 4)