Why Financial Budgeting Is A Must For Your Startup
Getting to Know Your Numbers
One of the appeals of Startups is that they often have a small workforce, and need low capital to get going. However, the biggest challenge that Startups will have to face is that limited capital.
Planning is a very vital aspect of anything that we do, and planning is very vital to the survival and success of your Startup. A large percentage of startups fail within three years. Often this can be because they spend too much on customer acquisition and/or the product, and their turnover is less than these outgoings
This is why you should plan first and act next. Customer acquisition is essential for the success of any business, and this needs to be your focus. One way to do so is by increasing your investment in digital marketing. But, before you do so, you should prepare a proper plan so that this increase does not affect your business’s project objectives.
I’ve written this article is to help you understand the importance of the financial budget for your Startup by highlighting what you should include and what common mistakes you should avoid.
Importance of The Budget:
You may have planned your product/service and your future goals or vision, but the budget is the road, and if you have not considered this, it will be really difficult for you to reach your destination.
Here are some points on the importance of preparing a financial budget for your Startup:
- Project profits and create timelines (i.e., once you reach X revenue, you can fund phase two of development)
- Apply discipline to your spending habits and differentiate between what you need versus what you want
- Compare initiatives when calculating and tracking return on investment (see the whole picture). There are always alternatives
- Have a financial roadmap that helps you decide when to make certain investments. If you don’t reach A, you can’t do B, however alluring that sounds
- Determine how much capital you want to raise, as well as how to sell your idea to investors if you are going that route
- Impress investors by having a clear and up-to-date understanding of your financials.
Here are some tips for creating a financial budget:
Prepare the budget according to your needs and wants:
If you are short on money, you should focus in what you really need. After that, when you start earning decent returns, you can focus on what you want and you can change the entire budget. However, if you want to make your startup successful, in the initial stage, you have to focus and spend on only what you truly need.
Prepare a surprise ready budget:
Forecast all the problems that could be faced. This is a very essential step.
No budget can be planned perfectly as there are many factors that we cannot control. This could be a change in the price of supplies, which will increase your expenses. There can be a change in financing, a shortage of raw product, movements in currency exchange, and, of course, pandemics!
Today’s pricing or rates will not be the same in the next year, and inflation should also be considered. You should also build some contingencies, just in case.
Develop Relevant KPIs:
No budget can be managed without establishing Key Performance Indicators (KPI).
The Key Perform indicator indicates the deviance between what was planned and what is achieved. Baseline budget is a type of KPI that tells you the deviance between the planned and the actual budget. Include these essential KPI’s to have effective project budget management.
Cost Variance (CV) – This indicates whether the actual budget is going above or below the estimated baseline.
Actual Cost (AC) or Actual Cost of Work Performed (ACWP) – This shows how much money has been spent on the project till date and you can compare it will the baseline budget.
Earned Value (EV) or Budgeted Cost of Work Performed (BCWP) – This shows the approved budget for the activities performed, up to a particular time.
Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS) – This is the estimated cost of activities planned as of reporting date.
Return On Investment (ROI) – This shows the profitability of the project.
Follow the 3 R’s (Revisit, Review, Re-forecast):
Uncertainty has become a characteristic of life. It is essential to keep an eye on the expenses so that the budget doesn’t get too far or too much over our original estimate. Thus, revisit your budget at regular intervals.
A 5% budget overrun would be easier to correct than a 50% budget overrun. If you do not keep an eye over it and re-forecast it, it will definitely become a 50% budget overrun before you know it.
Keep Everyone Informed and Accountable:
Set limits. An efficient employee may do their best, but if the budget is limited, they will have to become a bit more creative, and that’s no bad thing.
However, it is the duty of the owner/manager, or whoever is handling the finances, to make sure that everyone is informed and aware of the budget and their respective duties. Only a well-informed team can be a responsible and empowered team.
You can make use of Project Management Software, to keep your team informed and aware of their deliverables and goals efficiently.
Shyamal Parikh is the Founder of SmartTask, an online work management tool that’s helping teams be more productive by having clarity on who’s doing what by when. He has a penchant for researching and sharing strategies that could benefit a team’s productivity. You can find him on LinkedIn at https://www.linkedin.com/in/shyamal-parikh/