Now that you’ve had a chance to read about the basics of startup budgeting, you’re ready to get to the nuts-and-bolts of the issue, and build your own. But unless you’re an experienced accountant or finance professional, you might not know exactly where to start. That’s where our startup budget example considerations and guide can help: read below for concrete steps and some sample budgets to get you started.

What to Include in a Budget

First, it’s important to understand exactly what it is that you need to include in your budget process. The four critical elements are as follows:

  • Cost of Revenue: This is the total cost of manufacturing and delivering a product or service to your customers. It represents the direct costs related to your service offering, such as hosting, onboarding, or materials. For most startups and businesses delivering a service, cost of revenue is a more precise metric than cost of goods sold (COGS), as it explicitly accounts for additional variable costs like distribution and marketing.
  • Customer Acquisition Cost: This is, simply put, how expensive it is to acquire a new customer. It’s critical in determining your ROI, unit economics and the value of each customer to your business. You’ll need to have an accurate idea of this value in order to design a budget that keeps you profitable, or helps you reach profitability faster. If you’re unsure of how to approach this, it can be helpful to think of this as your marketing and customer acquisition budget.
  • Operational Expenses (OpEx/Overhead): Operating expenses are the costs of keeping the lights on, essentially, including everything that’s not a capital investment or significant one-time investment (CapEx), from salaries to rent to fees and licenses.
  • Revenue Projections: What is your plan for generating revenue? Do you have a sales team interfacing with other businesses, or do you have a marketing funnel that relies on paid advertising to drive paying customers or users? Understanding how you generate revenue will help you realistically project what your revenue potential for next year could be.

Who to Include in the Budgeting Process

The question of who to include in your budgeting process varies depending on what stage your business is in. If you are still an early-stage startup, you can probably keep the circle small, and include only management and your finance team or CFO, if you have one.

As your business grows, however, you will need to include more stakeholders in the budgeting process to keep your team on the same page.. If you are large enough to have multiple departments or teams with substantial budgets of their own, the leaders of those teams will likely be able to speak more accurately to the team’s resource requirements. Involving them early in the budgeting process will help you efficiently build an accurate budget.

At late stage startups it will be important to have buy-in from your investors, board members, and other stakeholders in the budgeting process, objectives, and outcomes. That being said, if you do have a board or investors at any stage you will likely want to share the final output with them to ensure there’s proper alignment.

Top Down vs. Bottom-Up

The next thing you need to decide is whether you are going to design your budget from a “top-down” or “bottom-up” perspective.

If you’re planning your budget from the top, then you’ll start with historical data from the previous year, then tweak it based on your expectations for the year to come. This is the simpler and safer option of the two.

If you go the bottoms up approach, you’ll want to start at the chart of account and vendor level of detail. From here you can use historical financial data to project what the future looks like. While more time consuming, this process is far more accurate and the preferred way to perform budgeting as companies grow. It can provide greater visibility into expense optimization, vendor analysis, and provide more granular organizational buy-in into your company’s financial plan.

It’s important to note that for most startups there is a good degree of connection between expense growth and scaling revenues, so be mindful of your fixed expenses (rent, non-variable payroll, utilities, etc.) and your variable expenses which scale with your company’s revenues (variable comp, hosting costs, etc.)

There’s no single ‘correct’ methodology for building your budget, the route you should choose depends on your specific situation. At many startups, a hybrid top-down/bottom-up approach will often produce the best results. The high-level expense and burn budget can be calculated from the top down based on the desired runway, and then a detailed bottoms-up budget can be constructed to fit within that plan.

Building Your First Budget

The first thing that you will want to do when building your budget is to review your historicals — make sure you have a solid record and understanding of costs and expenditures over the past year. Once you have this in place, talk to leadership, and get a clear outline of the company’s plan for the year, which you can use to create a rough set of allocations. The goal is to get a good understanding of your company’s projected burn to reach a significant milestone or goal, for each month of the year and then holding you and your team accountable by measuring the company’s performance against the budget.

Next, if you’re including team members or other stakeholders in the budgeting process, show them the rough plan, and then collect budgets from the appropriate people. Have your finance team, or whoever is the final say in the budgeting process, determine whether or not those expenses fit within the high-level plan.

Finally, be sure to get feedback from your board and investors (if you have them). They are typically experienced professionals and can help point out flaws, errors, and opportunities to improve your budget – which ultimately leads to better financial discipline.

Building a budget for your startup can be intimidating, especially if you don’t have a finance background, but it’s an important step, and is part of the foundation that you should establish to set yourself up for success.