Several months ago, I gave a presentation at PICO Jerusalem on how to write a budget for a business. At the end of the session, I asked the participants to send me feedback. One of them responded something along the lines of: normal small businesses might need budgets but startups are special! We are just trying to develop a prototype or process which will then be acquired by a company which will pay us piles of money for the privilege of obtaining our brilliant idea. Who needs old-fashioned budgeting for that?
Even if you are a 100% Genuine, Plucky, Israeli, Start-Up Nation Startup.
Unless, of course, your prototype is going to build itself. The code is going to write itself. The site beta model is going to create itself. The testing of your proposed treatment protocol is going to conduct itself. For free.
Not going to happen? Didn’t think so. Read on!
First, a high level overview…
I divide budget uses into three main categories.
- Ongoing business management
- Decision making
In short, far more than merely tracking plan versus actual and far more than coming up with a number to give to a potential investor.
Ongoing business management
This is what it sounds like—operating your business from day-to-day. Not only will a good budget allow you to manage your business more effectively and navigate changes, but the very process of creating and updating your budget can serve as a tool for assessing and setting your business goals and priorities and developing strategies to achieve them, all while keeping in mind the resources you have at hand.
Here is how the process might look, from start to finish.
|Planning||What do we want this year to look like? What are our priorities and key goals? What do we want / need to focus on in order to get to the next stage of our business plan? For example:
|Prioritization and resource management||We have X resources (e.g. money, people, equipment). How can we best allocate these resources in order to achieve the goals we set in our planning stage? For example:
|Cash forecasting||How can we manage our cash flows so that we have money on hand to pay the bills as they come due? For example:
|Internal control||Are we making the most intelligent, efficient and effective use of our resources? Are we sticking to plan? For example:
|Ongoing performance monitoring and evaluation||How are we doing in comparison to plan? Do we need to make adjustments? For example:
Our marketing budget is too low; we need to expand it in order to achieve our targets. What impact will this have on the budget and what impact has it already had on sales?
Note that none of these steps is an isolated, standalone activity; each one leads to the next. Furthermore, each one can also lead back to a previous step. You set your targets in the planning stage but when you get to prioritization and resource management, you realize you just don’t have enough money to do everything you want to do. So you return to step one and adjust the targets. Or your goal for the next year is to develop and launch two new educational apps. You build your budget accordingly. After you launch the first app, as part of your ongoing performance evaluation, you realize that your projections for how much marketing spend would be needed to properly launch the app was massively understated. 🙁 At this point, you go back up to the first and second steps and figure out what you can do with the resources you have on hand. Maybe you have room to expand the marketing budget. Alternatively, you might decide to push the second app for now and concentrate resources on the first.
You might be one of those rare birds who has a budget and a plan at the start of the year and manages to stick to both exactly, down to the last penny and the last percentage growth in sales.
But you probably aren’t.
As such, you will probably find modelling helpful. Modelling is simply asking a “what if” question –if instead of hitting our plan, X happens instead—and then seeing what the results are and what impact it has on your business plan. Modelling is useful both as part of building your initial budget as well as part of your ongoing cash forecasting and performance evaluation work. For example:
- What if our product launch is two months earlier/ later?
- What if our sales are 10% above/below target?
- What if our expenses are 20% above/below budget?
- What if we raise $1.5M instead of $2M?
- Stress tests: how much can we deviate from our budgeted revenues, expenses, time-scales and so on and still manage to achieve our targets.
One important thing to keep in mind when doing modelling is to consider not just the specific parameter you are looking at but also all the other things that are tied to it. For instance, if your product launch is two months earlier than planned:
- The launch marketing campaign will need to be moved up by two months.
- The new sales team members will need to be hired two months earlier (along with the placement fees, their computers, etc.)
- Any associated legal costs (e.g. contracts or registrations) will be moved up by two months.
And so on.
One way to model is to build in scenarios using @if functions into your budget file and toggle between them. If you are less of an Excel aficionado, just save a copy of your budget under a new name (e.g. Budget-10% sales drop) and make the changes to that.
Decision making is part and parcel of the ongoing management and modelling categories. However I’ve broken it out in order to highlight that, designed and used correctly, your budget can serve as a critical management tool.
Because, here’s the deal…. Unless you are being funded by some billionaire with bottomless pockets, you most likely aren’t going to be able to do everything you want and buy everything you want. You are going to have to choose—this, and not that. These can be high level strategy decisions, such as whether you want to go for VC funding vs. bootstrapping or deciding which market you want to break into first. These can also be more mundane expenditures decisions, such as whether you use that NIS 10K per month to hire a PA or another research assistant. In short, you are managing the course; it isn’t managing you.
And one last thing….
A final benefit to developing and actively managing a budget is that it can help you to stay on track. Think of the business world like a trip to the mall. Everywhere you turn, you see people dying to sell you stuff, from branding to business plans. If you arrive with money in your pocket and no plan, they are probably going to succeed. If you arrive with money in your pocket but a firm plan “I have decided to buy X and only X”, then you will find it easier to ignore the myriad offers and keep yourself (and your money) focused on your key priorities.