By David Ehrenberg, founder and CEO of Early Growth Financial Services
You have this great idea for a solution that could change the world. All you need is an investor to say "yes" and everything will fall into place, right? Not quite. That approach will often lead to a half-built company that becomes part of the 90 percent of startups that fail. Like all areas of your business, you need to be strategic about how you manage your money from day one.
Creating and following a budget -- an estimate of income and expenditure for a set period of time -- is a strategy that will grow in complexity as your company does. It can be an intimidating task to add up all your expenses and make projections when you have little or no past performance to use as a gauge. But that shouldn't prevent you from getting serious about a budget.
Why is budgeting so important?
A budget is a tool that, if used correctly, can benefit your startup in a variety of ways. It allows you to:
• Project profits and create timelines (i.e., once we reach X revenue, we can fund phase two of development).
• Apply discipline to your spending habits and help you differentiate between what you need versus what you want.
• Compare initiatives when calculating and tracking return on investment (see the whole picture).
• Have a financial roadmap that helps you decide when to make certain investments.
• Determine how much capital you want to raise, as well as how to sell your idea to investors.
• Impress investors by having a clear and up-to-date understanding of your financials.
The great thing about setting a budget is that it's straightforward and requires the same process regardless of your growth plans or operating costs. Follow these tips to set a budget for your startup.
1. Create a spreadsheet.
Create a spreadsheet with one worksheet (tab) for revenue and another for expenses. You may decide you want to look at them side by side, as well, but start with them separately. Your monthly budget will help you easily create your annual budget -- which will include annual subscriptions and other renewals.
Exclude one-time startup expenses from the spreadsheet, but continue to track them. Look for recurring transactions and ask yourself how each expense drives business. If you're pre-revenue, create an estimate based off of projected sales. Remember, your budget can help you set realistic goals.
2. Create separate sheets for each department.
Create separate worksheets for each department/workstream (product development, marketing, sales, etc.). Categorizing your budget this way is extremely helpful for financial and growth planning.
Because marketing and sales drive revenue, these should be your first areas of focus. Are you a sales-driven (mostly business to business) or marketing-driven (mostly business to consumer) organization?
3. Create best-case and worst-case budgets.
You want to be ready to strategically manage a surge of income and be able to survive as long as possible if things aren't going as planned. Your budget will help you determine two important figures -- burn rate and cash runway. These will especially come into play after you've secured your first round of funding.
Tracking them when you're smaller and your operation is simpler will help you make tracking and analyzing them a habit. Actual and potential investors will expect you to know them off the top of your head. Burn rate is the amount of money spent during a period of time (i.e., monthly burn rate or annual burn rate). Cash runway is the amount of time your company could survive based on its total current cash and current burn rate.
4. Stick to it.
It's not enough to set the budget, you have to stick to it. Of course, there will be times you need to adjust. Unexpected expenses or opportunities will arise. On the other hand, you may have a surge of revenue that requires you to evolve your budget. Work it if it's working, but don't be afraid to reevaluate from time to time.
There are several apps and software that are designed to make budgeting easier. However, my company's CFO has never found anything he likes better than a spreadsheet (as suggested above). Excel or Google Sheets work great. Software options on the market are for larger corporations with several departments and locations. By then, you'll have a firm or financial department managing the budget -- not just you and/or your co-founder.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm.