Whether you’re bootstrapping or looking for funding, a budget is a necessary first step in getting your startup off the ground. When looking for funding, a budget is the first of the many requirements investors will have (after seeing your pitch deck). And if you’re bootstrapping an absence of a budget can set you up for failure.
The reason startup budgeting is so difficult? Because it becomes a balancing act of two major priorities — balancing product development versus the risk of managing the runway of your funds to continue the operation.
To help you in this difficult process, this article will give you an overview of the different considerations you should keep in mind to make sure your budget helps take your startup off the ground and set it up for success.
Use Proven Resources To Build Your First Budget
Unless you have an extensive financial background to rely on, building a budget can be a mammoth task. For starters, it’s probably entirely new to you, so you have to learn as you go. But more importantly, building a budget is a lot of work. Here are 3 recommendations to make sure you can tackle this task in the best way possible.
Schedule plenty of time: Don’t create a budget in a hurry. You need to allow yourself enough time to cover all the different scenarios and create several iterations of your budget until you reach the final version.
Use proven frameworks: There are many different ways to create a budget. So this means that there’s no need to stare at an empty spreadsheet to try and figure everything out. A quick Google search for “budget template” will give a couple of different options. Choose one and use it as the foundation for your budget.
Get professional help: There are many CPAs that offer a CFO for hire type of service. If you have the funds, getting the help of a professional will save you time and money. If this is not an option, then at least try to get someone with a financial background to help you out.
Come Up With A Cold Hard Budget Number
If you were to ask a typical startup founder “How much money do they need?”, you would probably hear back something like “all of it”. There’s a good reason for this, that’s because coming up with a set number can be a difficult task on it’s own.
There are a couple of different approaches to come up with this amount.
How much funding can you reasonably get? This will depend on what’s your plan for funding your startup. Will you get a loan? Will you use your savings? Will you go out looking for investors?
How much do you need to make everything work? Some startups will need more resources to get off the ground than others. So being able to forecast your expenses accurately is critical to coming up with this amount.
Make A Big List (Nice To Have And Must Have)
An effective tool to know how much money you’ll need at each stage of your startup and how you’ll organize your budget is by making a list of nice to haves and must haves. The main reason to do this is to help you prioritize what expenses you can focus on while building your budget. Here are some areas where you can build the list.
Equipment: Do you need the latest and greatest gear? Or is it possible to get by with second hand or older equipment that still gets the job done?
Staff: Figuring out who is essential to keeping your startup running is important to know so you can budget accordingly.
Office space: How much office space do you need? Can you find a space in a more affordable area? Do you need office space at all?
Develop A Best And Worst Case Scenario For How Long You’ll Go Without Making Money
Most startups, if any, don’t start off making sales and money. After forming the business, there may be a period of time in which you only have expenses and little to no revenue coming in. For this reason it’s important to know your best and worst case scenarios for how long it will take you to make money.
Having these scenarios planned out gives you a series of strategic advantages.
If you are approaching your worst case scenario you can develop plans to look for additional funding or find a way to cut costs in order to keep going.
Just like going on a diet, having 100% adherence to a budget is unusual. Using our diet analogy, it’s easy to stick to a diet when everything is normal, but then something happens. It can be the holidays, a family reunion or any number of things that throw your diet off the rails. The same thing happens with budgets. You stick with it until something breaks, or you need to hire a new developer unexpectedly or get a consultant for a problem you otherwise can’t fix.
Now the question is, how much wiggle room should you build in? A good rule of thumb is between 10% and 15% per each line in your budget.
Having this little bit of wiggle room will give you the peace of mind that if something doesn’t go exactly as planned you’ll still be able to recover from it and not have to put out a fire.
Avoid Expensive Budget Consuming Pitfalls
This is typically a problem that startups with substantial funding come across, not to say bootstrapped startups don’t have it. This problem is burning through your budget way too fast.
In all fairness, no one goes out with the goal to burn their money. Going through your budget too fast is often the result of a failed strategic decision. It was a compromise or risk that was taken on in order to try to get a bigger payoff.
There’s nothing wrong with adapting your strategy. Rather the idea is to have the awareness of where the biggest threat to being able to stick within your budget comes from. With this in mind, here are 3 areas that are usually responsible for burning the most cash.
Excess staff: Startups are driven by people, and the more people, the faster it will go. This can be true, but isn’t always the case. There can be situations where you can be overstaffed. Even though you have great talent, the conditions for them to do their best work just aren’t there yet.
Changing or expanding the scope of the product: From a financial perspective, you always need to make the decision to balance the ability to build the best possible product versus creating the product that can start generating revenue.
Unfocused marketing spend: There’s an ever increasing number of ways in which you can spend money on marketing. Often your marketing plan tries to cover too much ground. The result is a large portion of your marketing budget spent without reaching the critical mass necessary to get the results you were going after. To avoid this, it can be a better idea to focus on a few marketing channels to optimize your budget.
Note: Another common pitfall is failing to prepare for tax season. Startups, even those with no profit, will need to file taxes. Depending on the complexity of your situation, this will require professional help (to avoid common tax issues).
Building Your 2021 Startup Budget
For most startup founders, creating a budget is the part they look forward to the least. That’s because founders are typically focused on their vision. And that’s why budgets are perceived as a limitation to what you want they want to achieve.
If you approach budgeting with the right mindset, you’ll realize it’s the tool that will make it all happen.
Need Help? Schedule a FREE consultation with a CPA!