Updated: Nov 29, 2021
A robust budget for your startup is easily one of the most important items in your Accounting & Finance department. In my career I've built over 100 budgets for startups, and they typically all center around the same core reasons:
The first thing that your investors are going to ask during the fundraise is what exactly are you going to spend the money on?
They would want to see that you have a clear, defined plan for how your business is going to grow, giving them the confidence that your startup will ultimately succeed. Odds are, if you can't communicate your startups roadmap to success in a budget...you may not have it all figured out yet.
Often times, your first fundraise will be the first time your budget gets prepared, and can it be one of the largest areas of scrutiny during due diligence.
Now, it's possible that you've already done your fundraise and investors want to understand how things are going? Often times after a fundraise, your investors will take a board seat with your company, and your performance against your budget will be a large area of scrutiny.
A proper budget in place will allow you to show not only what you think is going to happen in the future, but also a comparison of what actually happened.
Making more informed business decisions for your startup may be the most valuable reason yet for why you should have a budget. It gives you the opportunity to act quickly on any holes you may have in the ship, extending the chances of avoiding a sinking.
A large area of your budget will be centered around your hiring plan.
Understanding how many people you could hire at what date and what salary; how that affects your overall cash burn or when you're goi
ng to be running out of cash because of it, will be a huge value add.
Your Revenue build is the foundation for how your startup will succeed. How do you plan on acquiring new users? What is the repurchase behavior of those new users? What are the cash implications? The revenue implications?
Your revenue build will typically be where you spend the most time designing your assumptions for your startup's budget. It's good to loop in your Head of Sales or Head of Marketing to get the metrics you need to properly forecast out your revenue.
Another useful thing that your startup's budget should help you with is helping you understand what took place in the past, which will in turn make you see what's going to take place in the future.
Let's take a look at this example:
We're showing that revenue has pretty much been low for the first half of the year and is going to jump to close to a million dollars in the first month of projections. This should signal that you most likely have too aggressive of an assumption around how your startup will grow.
You should constantly be vetting your assumptions about the future with data from the past. While the future indeed should show a story of growth, there shouldn't be any insane jumps or changes.
It will be crucial at all times to know when your startup will run out of cash. Not planning for this date could be a catastrophe for your business.
It could mean that you have to raise a bridge at round a lower or stagnant valuation to what you most recently raised at, it could mean you have to make hiring cuts, or worst of all; It can mean that your startup goes out of business.
Entirely understanding when you're going to run out of cash will allow you to think six months in advance, and will help in the decisions that you need to be making to be able to prevent that.
Hey - thanks for checking us out. We love crunching numbers, and provide peace of mind for dozens of startups by managing their Accounting & Finance needs, while letting them focus on what matters the most - growing their business.