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Dec 11

Budgets for Startups

It's common for our startups to believe that budgets are only for established businesses with revenue / sales forecast. Fewer things are further from the truth. In actual fact, the less revenue and cash on-hand the greater the importance of budgets. We always advise our clients to begin a budget as soon as possible because it's easier to adapt the budget to changes to the business than to start a budget once a business is established.

So the question is why is a budget worth the time to maintain. The simple answer is if you don't manage a budget you can find yourself either in financial trouble in a hurry or find yourself incapable of making effective financial decisions, such as buying software tools, a new laptop, outsourcing, buying market research data, covering the cost of a pivot (more on this in other blogs), etc. When you manage a budget you can quickly see what can be cut out when cash is short.

Another very important benefit is to understand the length of your Runway. Runway is a term used by startups to represent how much time the company has left based on their burn rate and revenue plus cash in the bank (or available credit).

By starting a budget early you have the benefit of simplicity. We recommend using a spreadsheet application like Excel. Setup 3 tabs; Profit / Loss, Expenses and Revenue. So, respectively, these tabs represent; what money is available to you to use, the cost of running the startup and how much cash the company has / is getting. Track the numbers by the month. The Profit / Loss data will be determined by data contained under the Expenses and Revenue tabs.

Start with the expenses as this is usually the most complicated category. And start with the numbers for the last month. This gives you a baseline for the next 12 months. List all the outgoings, e.g., gas for car, standing bills (such as electricity), phone, internet, insurance, etc. If you have a lot of a particular category, such as networking events, use one line "Networking Events" and total them up. When you're happy with the list, copy all the values to the next 12 months. When you add additional monthly expenses, add them to the month they first apply then replicate them to the subsequent months.

Now move on to the Revenue tab. List the incoming revenue, whatever they are. Again do this for each month.

You build the Profit / Loss tab by displaying the total monthy expenses, the total revenue and show profit / loss as revenue minus expenses for each month. Also on this page include cash in the bank or line of credit and apply the P & L value for each month.

 

"This article may not be reproduced in whole or part without including the name of the author (James Naylor) and an acknowledgement of the fact the article was originally published in Shoestring Advice for Technology Startups (http://www.KENOVATech.com/blog). Any other use of this material is unauthorized and is a violation of law."

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