“Budget. a: A statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposals for financing them, b: a plan for the coordination of resources and expenditures, c: the amount of money that is available for, required for, or assigned to a particular purpose.” – Merriam-Webster Dictionary

A lot of things can kill a business. Not taking the time to do a proper budget is a fundamental one. Relying on lenience from your creditors when this happens is another one.

Like many other 10-year olds, I set up a lemonade stand at the local traffic light during summer vacation. I had the supply chain running like a well-oiled machine, I had zero rental expense and my retail location was sitting on prime real estate. It was a particularly hot summer in New York, and as my business grew I managed to keep my costs low and hence increase my profit substantially.

Unfortunately, a total lack of budgeting resulted in irreversible cash flow problems and my business was literally wiped out overnight when my main creditor pulled the plug. As it turned out, my mom was covering all of my major costs and I hadn’t paid her for any of it. Given her 0% share in the profits and my poor credit profile at the time, she decided to shut down the business.

For many entrepreneurs, budgeting is one of the less exciting aspects of building a business, but it’s crucial. Had I done a budget, I would’ve realized that the costs associated with the business were substantial, that someone had to cover them and that maybe the business wasn’t worth my time.

I sold the lemonade for 10¢ per cup. The main ingredient was lemonade mix, which cost $2.00 per can and made 8 quarts of lemonade. My customers got the lemonade in plastic cups which held about 6 fluid ounces each. When you include ice cubes, that’s 5 cups per quart or 40 cups per can of lemonade mix. In other words, my raw material costs were 5¢ per cup of lemonade. There were other variable costs to consider: water to make the ice cubes, electricity to freeze the ice cubes and plastic cups. To this came fixed costs: fridge, freezer, table, chair, pitchers, spoons. I should either have bought, owned and depreciated these items, or paid someone else to use their equipment. Also, I didn’t consider cost of labor or rent, which in this case didn’t matter. I wasn’t taking a salary from the operation as I was sole proprietor and rent at the local traffic light was free.

After all these costs, the fully-loaded cost of a cup of lemonade actually exceeded 10¢ making this an unattractive business. Had I done my homework properly, I would’ve either tested the market to see if I could raise the price of my product or decided against doing the business, thereby staying on better terms with my creditor for future business ventures.