The Basics: A Startup Budgeting Process
The budget process in startups is not at all like you'd find in larger companies.
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It is often last minute. The budget is signed off by the board sometimes just as the new financial year is about to start. This is because the baseline of the most recent trading data continues to influence assumptions on revenues, costs and cash
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A re-forecast is invariably needed within 6 months. Many growth startups will reforecast on a monthly basis as new revenue numbers come in and as cost decisions are changed.
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The financial model is fluid. Bigger companies are able to forecast with more certainty because their business model is more stable and there is less variability. A startup may re-do the financial model every time they budget.
Yet - having a meaningful budget is a necessary discipline to run any company, large or small.
How I'd go about building a budget for a startup
(T minus = time to budget approval day).
By the time you hit the final quarter of the year, you'll have had some high level strategic decisions with your board about the focus for the coming year. In fact, that's an ongoing conversation - but in any case you can't start a budget process without having had those conversations.
Then...
1/ Build a draft model (T minus 8 weeks)
The first challenge is to build a financial model that you think reflects the way your business works. There are many moving parts at play and you need to have a view on what factors have the most influence and what their impact might be. Start with marketing and sales factors and how they influence revenues, and then move onto overheads and how they affect revenues or revenues affect them.
2/ Involve the senior team (T minus 7 weeks)
Once there's a draft model, go through it with your senior team. Find holes in your logic, adjust the model to reflect your learning. Agree on the main drivers of growth and what costs are implied. At this stage you should also provide direction on some headline targets and/or constraints that you want the team to work towards.
3/ Assign owners (T minus 7 weeks)
Next up, discuss and agree who owns which section of the budget. Have those people go away and complete the model (and potentially rework it) and give you their revised version.
4/ Pull it all together (T minus 6 weeks)
It's handy if you have an excel whizz on the team to manage and edit the model. If that's not you, delegate but supervise very closely. Ask them to collect the reworked versions from each person and build a new integrated model. Ensure that the primary assumptions are on a cover sheet. Ideally have input cells in one colour and output cells in another. This avoids overwriting formulas with static data and shows you the main toggles you can adjust.
5/ Stress test the model with the team (T minus 5 weeks)
This is where the magic happens. Get the main 3-4 contributors in a room and have the excel model on a large screen. Stand around it and systematically talk through all of the assumptions together. This might take half a day, allow time. As you do this, the differing viewpoints on the team will help to calibrate the model. I've found this to really deliver important adjustments that an individual would have missed.
6/ Put a light version to the board for early feedback (T minus 4 weeks)
It's a good idea to get a draft budget summary to the board for their input a month before you need them to sign off on it. Explain the rationale, the main assumptions and headline numbers. You're looking for direction to what they'd like to see adjusted prior to signing off.
7/ Rework and building an operating plan (T minus 2 weeks)
Taking on feedback from board, rework the model to a final version that you all believe in are ready to deliver. Ready to deliver includes writing up a simple operating plan that outlines the main initiatives that you'll focus on. It's also useful to understand as a management team which costs are optional and which are fixed. Prepare a board pack with supporting narrative. Check, double check and triple check every formula in every cell.
You don't want errors to come out in the board meting.
8/ Circulate to board for review (T minus 1 week)
If you've done no. (6) well, at the board meeting you should get sign off and approval of the budget. Commit to delivering the budget that you sign off with the board with the team. If you slip on revenues, be prepared to cut costs so your cash burn is under control.
9/ Hold revenue and cost owners accountable (Ongoing)
It's a good idea to ensure that all budget owners receive a monthly report on how their cost overheads compare to budget. Hold budget owners accountable for their budgets. Revenues, direct costs and marketing expenses should be tracked daily and weekly. Set up systems to do this and you'll have fewer nasty surprises.
10/ Reforecast cash (Every month)
The single most important number to know at all times is how much cash you have. Related to that, if and when you expect it to run out. A budget will rarely play out as expected in a startup so be sure to reforecast this every month.
See also: How to Ruin Your Company with One Bad Process by Ben Horowitz
Other posts from my "Basics" series...