Creating a start up budget before you go self employed will give you financial control and help you plan. Whether you are transitioning out of a full time job or embarking on something completely new, you should consider investing some time in creating one.
What is a Start Up Budget
A start up budget is a financial summary of what it costs to go self employed.
It is made up of three essential sections:
- The costs to get set up as self employed;
- Monthly costs of being self employed;
- The amount of money you need to earn to cover all your monthly costs (“break even point”).
Key Benefits of a Start Up Budget if you Plan to Go Self Employed
Creating a start up budget gives an indication of three main things:
- How much money you need to invest on day one to “open for business”;
- The monthly costs you need to pay to keep going as self employed;
- How much work you need to have to cover your monthly costs and to make profit to cover the startup costs or invest in new things to grow.
Setting up a start up budget can take a little time because it involves a lot of thought and research. This is because the numbers are generally going to be based on estimates and predictions rather than actual figures.
It’s also essential that you take your time preparing your start up budget to avoid missing key costs or underestimating expenses.
To help with the estimation process, it is normal to include some amount in “contingency” for anything unexpected and round numbers up to create a buffer.
How to Create a Start Up Budget
The simplest (and free) way to do this is with a spreadsheet. Alternatively you can choose to invest in accounting software.
Free Start up Budget Template
Here’s a start up budget template you can download and use. It has some of the main costs that you may need to pay for when you go self employed to help get you started.
What to Include in Your Start Up Budget
You’ll need to work through each section of the start up budget to make sure you capture all your upcoming costs. There are four different categories of expenses you need to work through:
1. Start Up Assets
These are the assets (major items) you need to buy to get set up. They are things like:
- Computer or laptop
- Tools and equipment
Start up assets have a slightly different tax treatment when it comes to filling out your tax return (more on that later).
2. Start Up Costs
These costs are the initial ones you need to pay for to open for business. They include:
- Legal fees and licensing
- Accountants fees unless you choose to handle your own taxes and registration
3. Monthly Fixed Costs (Overheads)
Fixed costs are things you need to pay each month, regardless of how much you sell. Examples of monthly fixed costs are:
- Bank charges
4. Monthly Variable Costs
Your monthly variable costs are things that you pay for as you need them. So if you don’t sell anything you won’t need to buy these things. Here are some examples:
- Raw materials
- Sub contractors
Common Sense Questions to Ask Yourself once you’ve created your Start Up Budget
Creating your start up budget can be exhausting. But once you have done it, it’s worth asking yourself a few questions:
- How will you fund your start up costs?
- Can you sell and confidently deliver sufficient work to cover your monthly costs on an ongoing basis?
- Do you need to save some additional money up to cover expenses until you have sufficient work coming through the door?
- Will you make sufficient profit to get back or repay start up money?
Top Tax Advice
- Keep all your receipts – even if you aren’t sure at this stage whether you will go ahead with self employment or not. If you do go ahead, you may be able to claim anything you pay for against your taxes.
- Start up assets are tax allowable however they fall under the rules of ‘Annual Investment Allowance’. That means a different treatment on your self assessment tax return.
- You may pay for things that you use for work and personal reasons, like a mobile phone. In these cases you can only claim a portion as an allowable expense against your taxes.
So if you use your mobile phone for 60% work and 40% personal, then you take 60% of the total costs to put against your taxes.
- If you buy stock then you get tax relief on everything you buy if you use the cash basis to prepare your tax return figures. If you use the accrual basis then you need to do a stock take and only claim relief on the stock you have sold.
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