Starting a Business for Micro and Hybrid School Entrepreneurs: Part 4: Budgeting and Money Management

If you have read the first three parts of this series, hopefully you now feel confident that you can at least create your business as a legal entity. I strongly recommend that before filing, however, you have already done your market research and created a budget. These two pieces ensure that you have a market that wants what you are building and that you have a realistic and informed handle on the costs.

Creating a budget simply involves getting close-to-real numbers for all your expense categories, knowing what those categories are, and having a realistic plan for where your income is coming from.

Most programs are going to have a few basic expenses that can roughly be divided into Infrastructure, Salaries, and Supplies. Please note that these are NOT official bookkeeping terms. I consider them functional terms. The bookkeeping terms mostly line up, but depending on if you are a nonprofit or not, you might have to learn a bit of nuance. Right now, don’t worry about that!

Infrastructure

This involves all the things you need in place to conduct your actual service. Facility costs might include rent and/or utility costs. Insurances will include liability (for kids), property (for stuff you own like books and tables), worker’s compensation if you have employees (for injury on the job), and professional or directors and officers for protection against errors or unhappy people who might want to sue the Board. You will also need a payroll system if you have employees, which will ease employee tax payments and streamline paperwork when hiring. OnPay is one I have used but there are many others. These usually cost something like $50-$70 a month plus a $10 or so dollars per employee per month. You will also want a bookkeeping system although something like WaveApps is free and works just fine when you are small. Again, there are many others that will do an excellent job, and it is worth it to pay a few hundred dollars a year for the functionality to keep the books well (or pay someone!). You may also want a line in the budget for services such as Jotform or Docusign or Adobe. These can really ease the paperwork, signups, etc…But, they are usually not necessary when you are small. Good old fashioned paper and pen still do the job and without fees and tech troubles!!

Salaries

This one is self-explanatory. If you are a one-woman show as an LLC with no employees, you don’t even have to worry about anything except including your LLC in your personal tax filings. If you have any employees however, you will be setting pay for them in your budget and this will likely be a significant part of your budget. Don’t forget that you have to pay employer taxes! Budget about 10% of the salary number over again in for taxes the business must pay out (payroll will take care of this and yes, you have to pay these taxes as a nonprofit).

Supplies

This category can encompass your curriculum, furnishings, as well as your consumables like paper. You will likely end up buying some of this once upfront and then not needing some of it again, or at least not until the following year. Other things you will need to budget for regularly because you will need to replace them yearly or throughout the year. Think of everything you will need to function well from staplers to soccer balls to the right size table and chairs and budget a reasonable number. You can ask for donations, thrift, and you can get creative such as adding a first year equipment fee (if you feel sure your families can support it) for durable equipment and furnishings that will last several years once you have them.

Revenue

As you build out your budget you will want to do a little research on real numbers that your particular program will entail (talking to actual facilities, calling insurance companies, researching your curricula, finding out how much the going wage is for an aide or other employee in your area, and other things). Then add a 10%-20% cushion. Then add a miscellaneous category. You won’t be sorry!

I advise working backward from the total you get for estimated operating expenses to figure out how much you will need to collect per child to cover expenses (you will likely need a minimum number of kids-more on this a minute). You will use this number for tuition, or for your fundraising goals (or a combination of the two). (I walk you through a real sample of this in my Strategic Planning Course).

Once you have this working budget and are reasonably sure you have a market that will support it, you will use this planning budget as you begin operations. It is totally fine to tweak and adjust. That’s why you get real numbers, and also build in cushions!

You should also find what is known as a ‘shut down’ point. That’s the point where it just doesn’t make sense to open or you’ll lose money. For instance, you may be able to just cover your costs with 10 kids, but you’ll be out thousands if you have fewer than 9. This isn’t pure math though! It’s tough. Your numbers may give you a cold, hard fact to deal with, but you decide you are going to lose money or count on grants or fundraising or scholarship that first year just to get things off the ground. There is nothing wrong with this decision as long as you know what your long-term goals are and you know what you will do if you can’t get the revenue.

In general, you should open anyway if you’ve already gotten into any long-term commitments (like a lease you can’t get out of) just so you have some revenue toward a cost you can’t get out of (even if you are losing a little money overall), but don’t open if you are going to lose significant amounts of money or if bringing in students is going to actually add to your costs (more cost than revenue per kid such that having them enrolled doesn’t actually contribute to your ‘fixed’ cost).

Non-profits

Now…these are for-profit business principles and I would absolutely argue that wise money management would apply the same principles to a nonprofit that collects tuition. There is no reason to lose money and dig a hole in any business model!

A nonprofit that serves kids who are not paying tuition but is relying on donations and grants for revenue still shouldn’t dig a hole for itself and the principles still hold, but the major difference is that since revenue is coming from different often less predictable sources. In this model, having realistic systems for raising the money -and enough of it at the right times- is going to be your other best principle to hold to. In these nonprofits, it is essential to have a Board that is committed to actually doing the work of raising actual money (and having the connections to do so) and/or have a budget item for a grant writer or development officer. A big problem that can arise in a nonprofit is that a lot of well-meaning people sit in a Board meeting and think up great ideas, but don’t actually understand the amount of time and work that goes into raising significant funds and cultivating donors. It is essential that the Board who gets enthusiastic about donor-supported education has an actual, written-down plan for every step of the process including who will do what and when. There must be accountability built in as well.

Bookkeeping

Back to managing your funds…you can use the above broad categories to label transactions as they begin to happen, but chances are you’ll want a tad more detail. You will have your bookkeeping software connected to your bank account and each time there is a transaction, you will label what it was. This usually only takes a few seconds so just stay on top of it! You can use categories such as: curriculum, classroom supplies, office supplies, furniture, rent, insurance, professional fees, salaries and wages (make sure you label contractors as contractors not salaries. Contractors pay their own taxes and are contracted to provide an end product or service, but they are not actually employees. You can tell employees how, where, and when. You really just tell contractors what. More on this in the Hiring Workers series upcoming).

You can add even more detail if you’d like, but this will likely crowd your chart of accounts (that’s where you will list your categories) and is not necessary for taxes, although it may be useful for budgeting.

Hopefully you have a handle on basic budgeting and money management now. Remember that an accountant will likely be necessary at tax time and you want things in order and in a language they and you understand. So hire a bookkeeper if you can, but keep things in some semblance of order from Day 1 even if you can’t!