Budgeting... does anyone REALLY like it? We all know we should have a personal budget, one that's a nice and tidy mapping out of every penny. But do we do it? Often not. Some take a zen approach to things, which is fine on an emotional level. But running a company without a budget is akin to taking a road trip never looking at your gas gauge while driving and thinking "things will work out."
First, it might help to contrast a budget versus a plan or forecast. To be clear, they are very similar in the mechanics involved, so the difference is more about purpose. The plan is setting a vision and path to get there. A budget is more for prescribing behavior (spending).
For example, a plan might say "we're taking a roadtrip and know we'll need to spend $500 on meals, spread over the course of the week." The budget says "you get $10 for today's breakfast; if you get that extra blueberry scone for $3, then you'll need to skip that mid-day latte later on." So, the budget is the like the little angel on your shoulder... but ready to poke you with the pitchfork if you get out of line.
Budgeting is crucial for startups to ensure that spend doesn't grow, that managers have guidrails for spending, and ultimately that founders have a clear understanding of their financial situation and can make informed business decisions. However, setting realistic budgets can be challenging, especially for startups that are still in their early stages. In this blog post, we'll share some tips on the importance of budgeting for startups and how to create a budget that works for your business.
Set clear financial goals
Before you create a budget, you need to set clear financial goals for your startup. Your financial goals should align with your overall business objectives and provide you with a roadmap for achieving them. Setting realistic financial goals will ensure your budget can be achieved. It's hard to set Tuesday's breakfast budget if you haven't even decided how much you can spend on your road trip.
Track your expenses
To create an accurate budget, you need to track your expenses carefully. This includes both fixed and variable expenses. Fixed expenses, such as rent and salaries, are predictable, while variable expenses, such as marketing and supplies, can fluctuate. By tracking your expenses, you can more easily predict what expenses may come in the future. This is especially true for the items that might not be top-of-mind (it's fun to plan to spend the $3 on the latte, but what about the $35 on gas!)
Once you have a budget, by continuing to track your expenses, you can ensure you are managing the business as planned, and can quickly spot when spend has changed. Further, this process will naturally allow you to identify areas where you can reduce costs and optimize your spending. That monthly subscription for some new shiny software seems fun, but what are you willing to cut back on in order to stick to budget?
Create a cash flow forecast
Your budget should also include a cash flow forecast that predicts the actual timing and amount of your cash spend. We'll dive into this more in another post, but cash flow forecasting is both the messiest and the most important of all forecasting for startups. Your road trip will probably all be courtesy of Apple Pay... until the 30th of the month. But your startup may not be so lucky. Employee pay, the state and local taxing authorities, and the IRS are among those who will want cash, not credit!
Ultimately, cash flow forecasting allows you to anticipate your future minefields, so you can identify potential cash flow issues before they arise, and make any necessary adjustments. Also, accurate cash flow forecasts will often provide you with actionable insights into your financials.
Review and adjust your budget regularly
Remember that gas gauge? We'll want to check it pretty regularly. And if we're continually borrowing from tomorrow's dinner budget to pay for today's dessert, we'll need to make sure our budget was accurate.
Typically, budgets are reviewed quarterly or annually. But early on, they might be more frequent. The world is not cast in stone, so your budget may not be set in stone, either. It's essential to review and adjust your budget regularly to ensure that it remains relevant. This includes reviewing your actual expenses and revenue streams versus forecasts, and then making any necessary adjustments.
In conclusion, budgeting is crucial for startups to ensure that they have a clear understanding of their financial situation and can make informed business decisions. At HnO Consulting, we specialize in helping startups create effective budgets that support their financial goals. Contact us today to learn more about how we can help you create a budget that works for your business... we're always down for a good road trip!
Disclaimer: This blog post was authored in part by ChatGPT, a language model trained by OpenAI, based on the GPT-3.5 architecture. While the content has been created with the input of ChatGPT, it has been reviewed and edited by a human writer from our team at HnO Consulting to ensure accuracy and quality.