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What are good resources for preparing a startup annual budget?

Jeff Andrews's Profile


Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

There are experienced project CFO's and others who work in this arena who have a good feel for how to approach this. This is something I do routinely in my consulting practice

Topic Expert
Ken Kaufman
Title: CFO
Company: Community Dental Partners
LinkedIn Profile
(CFO, Community Dental Partners) |

Industry benchmarks can be helpful in terms of planning gross margins and expenses as a percentage of revenue. However, the biggest challenge with a startup budget is the sales forecast...that will need some careful thought and planning, especially if the startup has ZERO revenue right now.

Jake Kaldenbaugh
Title: Corporate Development
Company: CA Technologies, Inc.
(Corporate Development, CA Technologies, Inc.) |

Budgeting for startups is a completely different exercise than for larger more traditional companies. At its basic form, the startup budget should be based off of the progress being made in hitting its strategic milestones and supporting customer (& revenue) growth. The difficulty is that at their essence, VCs want all available capital to be spent as quickly as possible if it supports rapid, sustainable growth. So, if you have the right product and it is flying off the shelf (and driving your working capital negative), as a startup you have to follow that success and expend all of your capital which is a weird state for traditional CFOs to think about being in. Said another way, having blown through your capital base because you have found a great product<>market fit is a fantastic result. The budgeting process is then reduced to obtaining your next round of financing to fund continued growth. But given the above scenario, that won't be hard - finding it a price that minimizes dilution, however, will be.

Linda Keith
Title: Principal
Company: Linda Keith CPA Inc
(Principal, Linda Keith CPA Inc) |

Consider developing relationships through the relevant trade or professional association with CFO's from a similar company that would not be a competitor, perhaps because they are in a different geographic region. Tap them for reasonable assumptions and aske them for feedback as you put the budget together.

This will likely be a mutually beneficial exercise because it will get them thinking about their underlying assumptions from a different perspective.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

Ken & Jackie are correct on the sales forecast. It is very difficult unless you're lucky to have pre-sold something.

On the other hand, expenses are relatively easy. Rent, utilities, phone, etc. are all identifiable within reason and real numbers (I tend to be conservative, so I use the top range for expenses, bottom for revenue, worst case, a pleasant surprise of more profit). If you are selling product, you should already have sourced the cost and have an idea of both freight in and freight out.

Other expenses can also be determined by speaking with the appropriate professionals, attorney, insurance, etc.

Last point, do this for 18 months, because it you will have expense price increases (possibly rent, most definitely insurance).

Donald Koscheka
Title: Principal
Company: Bluecloud Communications
(Principal, Bluecloud Communications) |

As the owner of a start-up, budgeting keeps me up at night because I need to make sure I'm making the most efficient use of every dime in the business - we're pre-VC so don't have the luxury of burning through someone else's money!

As Wayne points out, you MUST have an expense budget - and check every line item ruthlessly, do you really need that item, is there a cheaper way to acquire it today? For example, we rely heavily on conference calling services. We use FreeConferenceCall because it meets our needs today and it's free.

Make sure you fully understand your cost of goods when planning your pricing strategy - we're a software startup and needed to factor in costs such as hosting and customer service when determining our sales costs.

Predicting sales is hard. You have to work from worst case here, as Wayne points out - generating a sustainable pipeline takes time - so make sure you have plenty of reserve capital to tide you over until you get some cash coming in. We have been in business for almost a year and are thrilled that we're pretty much covering our expenses.

Derek Quackenbush
Title: CFO
Company: Rising Data Solutions
(CFO, Rising Data Solutions) |

All good points. A lot depends on the type of start-up. If it's a technology or technology-enabled service I would recommend you read The Lean Start-Up by Eric Ries. Your budget should track closely to and enable the entity to achieve it's product/service goals, otherwise, what's the point? Start-up/early-stage is all about growth and the old adage it takes money to make money. Yes, one needs to spend within one's means (and not run out of cash!), but the point is not to maximize EBITDA or cash flow, per se, but rather to plow as much into the business as possible to help it grow, achieve its goals, and attract investors to get it to the next level. So I would recommend your plan not show any profits or positive cash flow in the short term in favor of top-line growth. Minimal G&A--focus on product and sales. Hope this helps.

Kirk Westbrook
Title: VP - Tech Banking Group
Company: US Bank
(VP - Tech Banking Group, US Bank) |

Derek is on the right track. Capital efficiency is a favored trait, espcecially when under consideration by investors. In many cases the investor is looking for top line growth, as quickly building market share can be critical. But they also want to make sure there is as little waste as possible. Demonstrating fiancnial prudence is good. Accordingly, have a realistic budget to manange to with the resources available. Also have at the ready a budget that can show how inveted capital will both be deployed and the resulting effect it will have in revenues.

Topic Expert
Marc Faerber
Title: CFO
Company: Amarantus
(CFO, Amarantus) |

What resources are needed is so dependent on the type of business you are dealing with, as others have pointed out. Each has it own uniqueness and particular issues. The budget process for the startup is the initial financial picture of whether nor not the endeavor has any change of making economic sense. All of that starts with the business plan and its assumptions, markets etc. So before even attempting to do a budget focus on how comprehensive is the business plan. Has everything, as best one can, been thought out. The best way to do this is to better understand the industry sector the entity will operate in, who is the customer, is the ventures product or service truly addressing an unmet market need? If it is a completely new market then it is that much more challenging to do, since no one else has and therefor what gives your business plan assumptions any validity. You need to be able to defend the budget assumptions which mean defend the business plan. Once you are comfortable with the business plan and all of it nuances the budget process starts to become much easier, almost self evident. One word of caution is to not get so caught up in the enthusiasm of the founders, etc. that you have lost your critical objectivity. It is very easy to get so confident in the ventures opportunity that you end up believing your own bull. Stay critical and objective. That is not easy and a founder may feel you are a doubter and want you off the team. There is so much more that can be said on this. I take a 80/20 approach, 80% of the time on the business plan and 20% on the budget.

Terrence Donohoe
Title: President
Company: R M I
LinkedIn Profile
(President, R M I) |

All quality advise and excellent sugggestions, although I favor Derek and Marc. One can never read enough. Likewise Wayne's admonishment to over/under estimate key factors is most likely the most practical, straight forward guideline any startup should heed. In the long run some reality checks keep the entire process valid and honest. Regardless of industry the basic rules remain the same. Be ever vigilant and stingy about spending anybody's money; be calmly objective about paying for the true necessities of entry level business; establish yourself, your company and ultimately your cash flow before hoisting any flag of success. The truth is there is something new and valuable to learn everyday one remains in business. Apply the lessons while continuing the education.

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