Starting a startup is all about laying the groundwork. It’s the foundation of what the company will be built upon. Building the product, finding your first customers, hiring employees, and running out of money are all parts of this process that needs to be prioritized. One of the most important foundations for any young company is to have a financial plan in place to effectively manage cash flow.
Every dollar plays an essential role in a startup budget. If you’re anything like the majority of small business owners, you’re starting up with less than $50,000 in the bank.
On top of that, many startups adopt aggressive growth-hacking practices, aiming to make the greatest impact with the smallest amount of money. That leaves little room for vague financial planning and surprise cash shortfalls. Yet one survey showed that 61% of small business owners don’t have an official budget.
Budgeting and forecasting can be daunting, so we’ve condensed the process into a simple, step-by-step guide. Build a budget that lets you estimate your business startup costs, monitor your cash flow, and stay lean from day one. You can follow these steps whether you’re using accounting software, a digital spreadsheet, or pencil and paper.
Who needs a startup budget?
A startup budget is a simple breakdown of how you plan to use your capital and cover expected business costs. Whether you’re pre-revenue or a later-stage tech company, a budget is indispensable.
Before you launch, a budget is the ultimate tool for determining how much money you’ll need to make it through the first few months. At this stage, it will be a realistic projection using market research and your best estimates. Without this roadmap, you may run out of cash too early or spend funds ineffectively.
After you’re up and running, your budget becomes an analytics tool. You’re able to see how you’re actually allocating resources and whether your team is spending and earning the way you envisioned. This helps you discover important questions and hit on opportunities for cost savings and business investments early on.
For example, if paid advertising is your largest expense category, is every channel funneling high-quality leads? Do you need to negotiate longer payment terms to free up funds for slow months? Is your spend truly aligning with each team’s key performance indicators (KPIs)?
Well-crafted budgets offer direct answers or point you in the right direction.
Why budgeting is crucial to success
Developing a startup budget doesn’t just let you avoid early financial missteps. It helps you make informed decisions in the long run. Here are a few more reasons startups need to allot time for regular budgeting:
- You can determine when to hire employees, buy equipment, and otherwise invest in your business.
- You can finance to scale using actual business data and avoid fundraising too early or over-borrowing.
- You can better estimate your break-even point and adjust variables as needed.
- You can predict cash shortfalls and line up funds or negotiate with suppliers and lenders early.
- You can identify retained earnings ahead of time and develop a plan for them.
- You can pinpoint extra cash to build your startup’s emergency fund.
- You can generate accurate financial statements, like a balance sheet or income statement, to share with investors and lenders.
A good plan executed today is better than a perfect plan implemented next week. Let’s dive into the 6 steps for crafting your startup budget so you can see the benefits.
How to create a startup budget in 6 steps
You can create a useful startup budget without estimating costs down to the cent or perfectly predicting the future. It’s normal for a new company to forecast figures based on market research, competitor analysis, and vendor quotes. You may already have some of these numbers from your research and development process.
The most important thing to remember is to be conservative with your assumptions and projections. It’s better to underestimate revenue and overestimate expenses than the reverse.
Now, let’s go over how to define your revenue and expenses, analyze the results, and make adjustment
A financial plan is different from your financial statements.
Instead of looking at what’s already happened, you make projections for the coming months, forecasting income and outlays. Your projections will act as an early warning system, helping you to plan for cash flow dips, identify financing needs and pinpoint the best timing for projects.
It also gives you a tool for monitoring your finances, allowing you to gauge your progress and quickly head off trouble. Here are six steps to create your financial plan.
1. Review your strategic plan
Financial planning should start with your company’s strategic plan. You should think about what you want to accomplish at the start of a new year and ask yourself a series of questions:
- Do I need to expand?
- Do I need more equipment?
- Do I need to hire more staff?
- Do I need other new resources?
- How will my plan affect my cash flow?
- Will I need financing? If yes, how much?
Then, determine the financial impact in the next 12 months, including spending on major projects.
2. Develop financial projections
Create monthly financial projections by recording your anticipated income based on sales forecasts and anticipated expenses for labour, supplies , overhead, etc.. (Businesses with very tight cash flow may want to make weekly projections.) Now, plug in the costs for the projects you identified in the previous step.
For this job, you can use simple spreadsheet software or tools available in your accounting software. Don’t assume sales will convert to cash right away. Enter them as cash only when you expect to get paid based on prior experience.
Also prepare a projected income (profit and loss) statement and a balance sheet projection. It can be useful to include various scenarios—most likely, optimistic and pessimistic—for your projections to help you to anticipate the impacts of each one.
It may be a good idea to seek advice from your accountant when developing your financial projections. Be sure to go over the plan together, as it is you, and not your accountant, who will be seeking financing and who will be explaining the plan to your banker and investor.
3. Arrange financing
Use your financial projections to determine your financing needs. Approach your financial partners ahead of time to discuss your options. Well-prepared projections will help reassure bankers that your financial management is solid.
4. Plan for contingencies
What would you do if your finances suddenly deteriorated? It’s a good idea to have emergency sources of money before you need them. Possibilities include maintaining a cash reserve or keeping lots of room on your line of credit.
5. Monitor
Through the year, compare actual results with your projections to see if you’re on target or need to adjust. Monitoring helps you spot financial problems before they get out of hand.
6. Get help
If you lack expertise, consider hiring an expert to help you put together your financial plan.
Download our free financial plan template to start building your financial plan now.
Conclusion
Whether your acting as the CFO of your startup, trying to get venture capital funding , or simply figuring out the financials of your business plan, you’re going to need to create a financial plan.