Financial statements are vital to investors. But how do investors use financial statements? Before your meeting, learn what they want to see and why.
August 29, 2022
Creating an effective budget is crucial to setting your startup up for success. Research estimates that out of the 31.7M small businesses and startups in the U.S., “20% failed in the first year, 50% within five years, and 65% within 10 years.” A significant reason for this is running out of money, which often boils down to a lack of good budgeting practices.
Whether you’re working through the logistics of a budding business idea or you’ve already raised funding for your startup, a reliable budget is key to ensuring its financial viability. Without a clear understanding of your expected costs and the amount of capital you have on hand, you'll likely never be able to make the right financial decisions for your business.
If you're new to budgeting, you've come to the right place. Read along as we define the elements of a startup budget, and walk you through how to create one step-by-step.
The most straightforward use of a startup budget is to help business owners understand how much money they need to get off the ground and how much they require to cover expected business expenses over time.
Founders should always know how much capital they need to bring their business to life and help it grow. Budgets are a crucial element of a business plan, required to secure a business loan and an integral part of your fundraising deck.
Each industry vertical has its own set of standard expenses and growth milestones. For example, here are a few milestones and related costs for a SaaS business:
Creating a budget can be daunting if you’re new to the exercise. We’ve broken the process down step-by-step to help make it more approachable and ensure you don’t miss a thing.
Fire up your computer, open a spreadsheet, and list all the items required to start and grow your business during the first 12 months. Some things to consider as you think about your expenses:
Be specific about exactly what you need, providing as much clarity for each line item as possible. For example, don’t just include a line item for “computers.” Instead, have a line for each specific item, such as “MacBook Pro x 3,” “Magic Keyboard x 3,” “Magic Mouse x 3,” — you get the picture.
When listing potential business expenses, ensure each line item includes an estimated cost for 12 months. If you’re unsure of the costs associated with an item, do some research to make an educated estimate. Be generous in your estimates. It’s better to allocate extra funds for a line item than find yourself short on cash.
It’s commonly suggested that startups pad their budgeted expenses by ~10% to protect their business against cash shortages or unforeseen circumstances. It’s also common for startups to underestimate the costs of running a business; a few areas startups routinely under-budget for include:
Now that your long-tail list of expected costs is in place, it’s time to organize these expenses into three key categories:
Essential startup costs are typically one-time costs required to get your business up and running. Essential costs can vary significantly depending on the type of business you are starting; for most startups, they may include a mix of the following expenses:
Note: Most of the above essential startup costs are also considered fixed costs. For this budgeting exercise, we’ll break the essential startup costs from the long fixed costs list to determine exactly how much capital your business will need on day one.
Fixed costs are the ongoing costs related to running your business; these costs persist regardless of sales or business performance. Basic fixed costs most startups should budget for include:
Variable costs are expenses that can increase or decrease relative to your business output or business priorities at a given time. Variable expenses may include:
Various income sources may contribute to your monthly revenues; the most common sources of income for startup businesses include:
For new startups with no sales history, the best course of action is to refer back to the expenses you’ve estimated for the first year of your business and work out how many sales you’ll need to cover those costs — your break-even point.
Alternatively, founders can generate sales projections using relevant market research, such as buyer personas, industry data, and trends.
Businesses with existing sales revenues can reference historical data from previous sales figures to get an idea of what you can expect from sales in the coming 12 months.
Capital from any funding sources, including personal assets from yourself and co-founders, angel investors, traditional venture capital firms, or bank loans, should be itemized in this section.
Many banks offer high-yield startup bank accounts where you earn a decent interest from your savings or money market account balance. Note these earnings in the revenue section of your budget.
You’ve done the hard work of outlining the many items which will help determine the costs required to start and run your startup. Now it’s time to add them all up to find the starting point of your startup’s budget. Here are the steps:
Calculate the sum of all costs outlined in your spreadsheet during Step 1 to find your annual budget; divide that number by 12 for your monthly business budget.
This number may be more than you had envisioned. That’s ok; this is only the starting point. Now, we’ll go through a few exercises for adjusting your costs to arrive at a more comfortable startup budget.
Revisit Step 2 of categorizing your expenses. Start by looking at variable costs. Many of these items are ‘nice to haves,’ not ‘need to haves’ in the earliest stages of your startup. Go line by line and adjust these items based on business priority.
For example, do you need to invest in an external marketing agency during year one, or would it be more cost-effective to hire a consultant to start? Is it necessary to invest in a fully-fledged CRM program, or can you subscribe to a lower-tier service until you’ve increased your customer base?
Next, zero in on the fixed and essential cost line items. Consider alternatives if any of these expenses are pushing your budget’s envelope and that they are all vital to your business.
Take the total startup costs you calculated in Step 4, broken down by month, and compare them with your monthly revenue estimates. If you are not generating enough revenue to cover business costs, you must either refine your total costs further or make a plan for securing additional capital to fuel your business.
Budgets are not a “set it and forget it” business planning exercise. You should regularly revisit your budget at the end of each month when you receive your financial statements (P&L or Income Statement, Balance Sheet, and Cash Flow Statement). At this time, review how your actual costs are tracking against your budget and make adjustments as you go.
Using a spreadsheet to maintain your budget will do for early-stage businesses in planning mode. We suggest Google Sheets to share, collaborate, and maintain your budget with your business partners and advisors.
Once your business has some financial infrastructure, such as bank accounts or corporate credit cards, we suggest accounting software like Quickbooks Online to help automate some data entry, keep your business finances organized, and easily view your costs.
If you’re just starting out and taking the Google Sheets approach to budgeting, check out this free template. We’ve broken it all down for you in one simple-to-use sheet.
Beyond spreadsheets, if you're unsure how to proceed or are not comfortable creating a budget on your own, ask for help! At Zeni, we work with early- to growth-stage startups to manage their day-to-day business finances, including helping set and maintain budgets.
All customers gain access to a Zeni Finance Dashboard, which displays their company’s financial figures in interactive, real-time reports, such as operating expenses, net burn, revenue, cash position, and more.