Objectives:
To ensure the potential new business owner knows exactly how much income the business needs to sufficiently generate, in order to cover personal living costs to survive.
To analyse how financial circumstances may change when becoming self-employed.
Overview:
When setting up a business, the first thing to do is work out exactly how much money the business needs to make to support the individual. This ‘Personal Survival Budget’ activity is designed, so that the new business owner knows exactly how much money the business needs to make, in order to support and cover personal expenditure. This is critical to ensure that business and household expenses are kept separate and to support business decision making and planning.
Activity:
This takes approximately 20-30 mins to complete the template below.
1. First of all, remember that you are only calculating your personal expenditure, not any expenses the business may incur.
2. Ensure that you include all of the items that you have the responsibility to pay for in your household. If you have any other items of expenditure that do not appear on the list, include them in the ‘other’ box.
3. Secondly, remember that your financial circumstances will change when you become self-employed, as you will begin paying class two national insurance contributions monthly, and any benefits that you are currently entitled to, such as housing/council tax benefit, may reduce or stop. If you are not sure what benefits you may be entitled to, seek advice from a Welfare Rights Advisor.
4. Finally, the budget is based on your expenditure per month, so if there are bills that you pay weekly, quarterly, or annually, remember to divide them by the appropriate amount.
Items of Expenditure | Monthly £
|
Rent/ Mortgage | £ |
Council Tax | £ |
Water | £ |
Utilities (gas, electricity, water, oil, etc | £ |
Phone | £ |
Food | £ |
TV License | £ |
Home/ Life Insurance | £ |
Loan/ Credit cards/ personal debt repayments | £ |
Newspapers/ Magazines | £ |
Car Tax/ Insurance | £ |
NI Contributions | £ |
Saving Plans | £ |
Other | £ |
Total Expenditure | £
|
5. Now that you have established your average monthly expenditure, the next step is to identify any income that you may already have, or possibly claim for, to help meet this expenditure. Again remember that this is a monthly budget. Depending on your personal circumstances, you may receive some, all or none of the items below:
Estimated Income Outside Self-Employment | Monthly £ |
Income from family/partner - parents | £ |
Part-time job | £ |
Full-time job | £ |
Benefits | £ |
Other income | £ |
Total Income Outside Self-Employment | £ |
6. To give a new business the best chance of survival, it is best to minimise your drawings as much as possible in the first year to avoid getting into debt. For this reason we establish the minimum drawings that you could take form the business and ‘survive’. This is calculated by taking the total income (above) from the total expenditure . What remains will be the minimum amount that you could draw from the business per month in order to survive.
Minimum drawings calculation | Monthly £ |
Total expenditure | £ |
Total income outside self employment | £ |
Total expenditure less total income | £ |
NB. In some cases, your income may exceed your expenditure. This occurs when there is already enough income coming into the household to cover all the bills, and drawings from the business are not ‘necessary’. In this case it is best to set very low drawings to allow the business a healthy cash flow.
Skill Development:
Reflection
Financial analysis and budgeting
Rationalising
Decision making
Resources:
Flip Chart / Power point (if presenting in a group)
Calculator
Hand out the following template for the entrepreneur/ small business owner to complete (link)
Template to hand out to business owner / entrepreneur
To help estimate the minimum amount of monthly drawings that you need to take from the business to cover all your personal day to day living costs, please complete the tables below and add any other items of personal expenditure that may not be on the list.
Items of Expenditure | Monthly £
|
Rent/ Mortgage | £ |
Council Tax | £ |
Water | £ |
Utilities (gas, electricity, water, oil, etc | £ |
Phone | £ |
Food | £ |
TV License | £ |
Home/ Life Insurance | £ |
Loan/ Credit cards/ personal debt repayments | £ |
Newspapers/ Magazines | £ |
Car Tax/ Insurance | £ |
NI Contributions | £ |
Saving Plans | £ |
Other | £ |
Total Expenditure | £
|
In the table below please list any income outside self employment that you receive such as: Income from Partner/ Tax credits/ Child benefits/ House Keep
Estimated Income Outside Self-Employment | Monthly £ |
Income from family/partner - parents | £ |
Part-time job | £ |
Full-time job | £ |
Benefits | £ |
Other income | £ |
Total Income Outside Self-Employment | £ |
Minimum drawings calculation | Monthly £ |
Total expenditure | £ |
Total income outside self employment | £ |
Total expenditure less total income | £ |
This section highlights that you will need to draw a minimum of £_____ from the business to cover all personal day to day living costs.
References:
https://www.princes-trust.org.uk/help-for-young-people/tools-resources/business-tools/finance-advice