How to Develop a Budget for a New Product or Service

When launching a new product, you’ll run into a variety of expenses such as product development and testing, production costs, marketplace research, marketing communications, packaging, shipping and customer service. Divide your budget into these sections to determine which you will handle yourself and which you will outsource.

If you’re adding a new product or service to an existing company, meet with your financial manager to determine what your overhead costs will be. These are your costs to run your company, rather than make your product. Even though the new product won’t increase your rent, property taxes or phone expenses, you might want your new product to absorb some of these costs. Production expenses are those costs directly related to making each unit of the product or delivering the service.

If your company has department managers, meet with each one to get their best estimates as to what their departmental costs will be to launch the product or offer the service. If you are a small business owner without formal departments, consider the following expense areas: materials, supplies, labor, marketing, sales and overhead. If you will be outsourcing any areas, such as production or packaging, get bids from contractors to determine these costs.

To calculate your costs for the launch a new product, project how many units you might sell the first year. This will help you estimate your expenses. Divide your expenses into start-up and operating costs. Start-up costs include pre-sale expenses such as buying machinery to make a product or conducting a job search to hire people to deliver the service. It includes your product development, marketing research and distribution costs. Operating expenses include your ongoing costs once you launch. Using several price points, calculate what your revenues might be to help you set your spending levels for the year. If you are offering a service, try to project the number of engagements or hours you will book.

Using spreadsheet software or an accounting program designed for business budgeting, create a budget document. List your expenses by category. Note which expenses are overhead and production costs for easy breakout to help you monitor and track these costs during the course of the year. List your potential revenue from the product, based on conservative and optimistic sales projections. Adjust your expense levels after you subtract your total estimated expenses from your projected revenues if you have a net loss that’s too large for your business. Many businesses don’t expect a profit during the first year after they launch a product or service if they feel it will create significant profits once the start-up costs are paid and sales escalate.

Additional Resources

U.S. Small Business Administration: Budgeting for the Small Business

Inc.: How Do I Calculate My Overhead Rate?

Entrepreneur: How to Forecast Revenue and Growth