Founders usually know how much runway they have, but may not be budgeting for their startup with an explicit system. While this can work for a time, investors want to see clear, data-backed strategies for how their money will be or is being used to deliver returns.
This guide will walk you through the essential steps to develop a budget that supports growth and helps make a strong business case for prospective investors.
Budgeting Benefits
Whether you’re pre-seed or have raised a Series-A funding round, budgets are crucial. They help allocate resources, predict cash flow, and attract investors by demonstrating effective planning.
For example, once you’re in the revenue stage and working toward profitability, your budget is a navigation tool. Comparing prior budgets against present spending and revenue clarifies investments that are paying off and where cuts need to be made.
Other benefits include:
- Estimating break-even points and cash runway.
- Predicting surpluses, allowing you time to plan investments in advance.
- Generating financial statements, balance sheets, and income statements to share with investors and lenders.
- Improving expense management and cost control.
- Simplifying tax preparation and compliance.
Budgeting Strategies for Startups
Financial planning is undoubtedly math-heavy, but there’s an element of creativity as well. Budgeting should be approached based on your startup’s unique circumstances and goals. After all, pre-revenue, growth stage, and mature startups operate completely differently, as should their budgeting process.
Here are a handful of approaches startups commonly employ:
Historical budgeting uses past data as a baseline for the future. Brand new startups don’t have the luxury of historical budgeting, but those that have been in operation for some time can make reasonable estimates based on recent experience.
Zero-based budgeting involves rebuilding the budget from scratch for each new period; expenses are analyzed and justified on a case-by-case basis. The approach takes more time than using historical budgeting, but can also prove more economical.
Rolling budgets are updated monthly or quarterly, rather than annually. Regular adjustments are ideal for startups in unpredictable markets or going through rapid change.
Percent of revenue budgeting allocates funds based on fixed proportions of projected revenue. This method may seem attractive, as it allows new founders to use industry norms to benchmark their investments. However, budgeting using fixed percentages rather than realistic needs assessments is potentially unproductive.
Project-based budgeting allots money on a case-by-case basis, allowing you to precisely allocate resources according to the specific needs and returns of a project.
Scenario-based budgeting plans for scenarios ranging from conservative to optimistic. By forcing you to decide in advance where you would place scarce or surplus funds, you can react more rapidly to an evolving business environment.
Step by Step: Creating an Effective Startup Budget
You don’t have to track every penny or make perfectly accurate estimates to have a useful budget. It’s normal to forecast revenues and expenses based on well-informed assumptions.
The key is to approach your assumptions and projections cautiously; it’s wise to underestimate revenue and overestimate expenses rather than the other way around.
Step 1: Gather Your Tools and Decide on a System
Depending on your circumstances, you may start with anything from a simple spreadsheet to DIY payroll software or indinero outsourced accounting services.
Regardless of your decision, budgeting isn’t a one-time activity; it’s a dynamic process that should be revisited regularly. You never want to be in a position where you’re digging through emails for receipts and invoices; designing a systematic process for tracking cash flow is key to budget hygiene.
At minimum, your budgeting system should avoid commingling personal and business funds. Additionally, it should centralize record-keeping so that you’re never scrambling for information and include regular bank reconciliations, expense, and revenue reviews.
Step 2: Identify Initial Startup Costs
These investments must be made before officially launching, covering everything from registering an LLC to purchasing equipment, office space, and vehicles.
When planning, don’t group expenses into vague categories like “website costs” or “marketing.” Instead, break each down into component parts. The more detailed you are, the better you can estimate costs, identify where to cut, and avoid surprises.