this posts provides useful advice and guidelines for entrepreneurs on how to plan and prepare the right budget for startups.

The Right Budget for Startups

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In preparing for battle I have always found that plans are useless, but planning is indispensable.” (Dwight D. Eisenhower).

Make no mistake, every company, or organization needs to develop a plan for how it intends to achieve its goals. Even though your plan is likely to be useless the moment you leave the building.

Nevertheless, the insights, knowledge, preparation, and coordination that came out of the planning process would remain relevant. And, they will serve you well in responding to the changing circumstances you would face.

This is true for large corporations as well as early-stage startups.

However, in my humble opinion, a startup company requires a different type of plan than that of a company with a proven, stable business model. I’ve discussed that in length in my previous posts.

Why do startups need a different type of budget than an existing company

In this post, I would like to focus on a critical part of the plan—the budget. A
budget expresses strategic plans of business units, organizations, activities or events in measurable terms
. It should detail what human, capital and financial resources you need, and when, to successfully execute your plan. It should also describe how you intend to spend the cash you have allocated to the execution of the plan.

Here again, I believe that startups require a very different type of budget planning than that of an on-going business; Different in its objectives, planning process, and the level of its financial details.

A company (or a business unit) with a stable business model would typically focus on growth. That could include revenue growth, profit growth, and market share growth. It has fairly good visibility into its business and a low likelihood of major changes. That’s generally true for the next 12 months.

Thus, its budget serves the management team as a tool to effectively allocate and manage its resources in order to achieve the company’s financial goals. It’s also used to identify trends and changes and respond to them in a timely manner. Another use of budget is as a performance measurement tool for managers and teams.

A startup is an entirely different story. As Steve Blank defines it, “a startup is an organization formed to search for a repeatable and scalable business model”. This means that it has no visibility into its business, and is likely to undergo several changes before it finally finds the right business model.

And yet, startups still need plans and budgets, but for very different purposes than those of on-going businesses.

How to prepare the right budget for your startup

To begin with, startups need to develop a business model. A business model describes how the company intends to create value for their target customers, deliver it to these same customers, and generate revenue and profits in the process.

The business model (the plan), describes the startup’s customer development plan, and product development plan. These are the two core activities that should eventually result in a product-market fit and a “repeatable and scalable business model”.

To fund these activities startups typically raise money from investors. Although, in some cases, they can use a bootstrap approach and fund it directly from its founders and/or early customers.

In order to know how much money to raise from investors, entrepreneurs need a detailed enough plan and budget.

Your Budget Should Match Your Stage

Now, this is where it gets tricky. What is detailed enough? I’m sure there are several different opinions and answers to this question. My answer is: it depends. It depends on what stage your startup is in? How many unknowns and uncertainties are in your plan? What do your prospective investors expect? Etc.

If you’re an early stage startup, trying to develop its minimum viable product (MVP) for its first customer, then I would argue that there are still many unknowns in front of you. Therefore, you should acknowledge that in your plans. List all the assumptions and hypotheses that you’re making and how you intend to test them.

If you don’t have a very detailed definition of your first product, it’s impossible to accurately estimate how much money you will spend on R&D each month, for the next 12 months. Doing so might give your investors the false impression that you have a high degree of certainty in your plan. They might be disappointed later when you make your next pivot.

I suggest developing a likely scenario, based on reasonable assumptions and well-documented hypotheses. Then using it to develop a plan that details your key milestones for the next 12-18 months. Next, you can develop an estimated budget for the resources and capital you will need to execute this plan and reach the milestones you’ve defined.

Such a budget should include the relevant categories for your plan and milestones. For example: product development activities, such as SW development, HW design, test & QA, etc., and customer development activities, such as business development, partnerships development, and marketing.

The main objective of such a budget is to provide a reasonable estimate for the amount of money you need to raise. Thus, there is no point in making it a monthly budget. A quarterly budget would be as good and more credible. It would require less of your valuable time, and the results should be the same.

When It’s Time for a Detailed Budget

After you’ve secured the funding required to move your startup forward to its next major milestone, and you know exactly how much money you have, it’s time to develop your actual work plan and budget.

This work plan needs to be detailed. It should specify all the key tasks, their duration, and their associated resources. Resources should include: people, capital, and cash. Consequently, your budget needs to represent this work plan. It should be as detailed as required to ensure that your cash lasts until the successful completion of your plan. Ideally, you should budget your cash to last you through the next round of investment.

This is a true survival need. The #1 cause of premature death of startup companies is running out of cash. Your budget’s primary purpose is to avoid that from happening. Thus, it needs to be a useful tool to effectively manage your limited cash as you execute your work plan.

Happy budgeting!

 


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