Startup Budget Basics: How to Make a Business Budget
The foundation of every business is finances, but a lot of founders overlook the importance of establishing a strong startup budget when first starting out, often skating on raised capital or the expectation of future funding.
The foundation of every startup is its budget, but a lot of founders overlook the importance of establishing a strong budget when first starting out, often skating on raised capital or the expectation of future funding. The excitement of new beginnings can overwhelm the need for long-term practicality.
Combine that initial excitement with budgeting’s bad reputation – it takes a significant amount of time, it’s difficult, it forces reality onto your initial dreams – and you can see why many startups leave it as a task for later on. But understanding how to make a business budget and following these startup budget basics will not only help you survive the lean times, but it will help you grow effectively and responsibly if and when your startup takes off.
Why Setting & Maintaining a Budget Matters
Having a proper budget is a core consideration for any business and one of the first things you should set up when starting out, but it’s also worth understanding why and how a good budget can help your business succeed.
Most importantly, a budget will help your startup team maintain fiscal responsibility and rigor. It’s a lot easier to avoid careless spending and prevent yourself from getting stuck spending more than you should on products or services you don’t need if you’re keeping meticulous and detailed records. If you want your startup to survive the rocky first few years, when most businesses fail, a budget is a critical part of that foundation.
A well-maintained and accurate budget will also make it easier to reach agreement with your board or executive team about where you want to be and what you want to achieve, and to measure your startup’s performance against that benchmark.
Finally, a good budget gives you the tools you need to course correct if things don’t go your way — it’s much harder to make cuts and tighten your belt during lean times if you aren’t keeping the right records.
Startup Budget Basics: Budgeting Cadence
On a more practical level, there are some best practices to follow when building your first budget that will put the foundation in place so that your startup is set up for success. If possible, you should build your first budget at the end of the year, in November or December (make sure to give yourself or your team enough time to make adjustments or fix anything that goes haywire, especially if this is your first budget). Share this budget with your board to get buy-in before the new year starts so that everyone agrees on what your company’s year to come should look like.
Plan to revise your budget quarterly if possible, or at least semi-annually, to reflect changing realities or new strategic goals. This is also when you are going to be able to create a ‘planned vs. revised vs. projected’ budget, which will be a useful tool in measuring the success and trajectory of your startup going forward.
Budget Versus Projection
It’s important to understand the difference between a budget and a projection, and why you should try to maintain both. A budget, as discussed above, is locked in at the beginning of the year and revised at set intervals. This is put in front of the board or the management team for approval, usually at the end of the year, and drives everything, including compensation.
A projection, on the other hand, is aspirational, it represents a ‘what could be’ perspective, and includes everything from revenue to raised capital. These are constantly shifting, and are based on the best estimates that your finance team has on business outlook. We’ll go into projections in greater detail in a later post, but even if you’re not sure about what the difference is, try to create one of these at the same time as your budget, it will prove useful as you grow.
Making Your First Business Budget
We will go into some more of the finer details in a later article, but you should also decide whether or not you are more comfortable building your budget from a bottom-up or top-down perspective. The first focuses on structuring the budget around accounts or vendors, and the second starts with an idea of how much you want to spend on each aspect of your business, i.e. “I think we should spend X on marketing, Y on payroll, etc.” This will help guide your budgeting process.
Depending on how large or complicated your startup is, making a budget could be the work of a day or of several weeks, but it’s important that you have this keystone in place as soon as possible. Having a budget and a system for keeping it accurate will set you up for success in every area of your business.
Make sure to check back for the next installment of this series, where we will share our budget template and show some examples of how to create one of your own!