Whether you’re bootstrapping or looking for funding, a budget is a necessary first step in getting your startup off the ground. When looking for funding, a budget is the first of the many requirements investors will have (after seeing your pitch deck). And if you’re bootstrapping an absence of a budget can set you up for failure.
The reason startup budgeting is so difficult? Because it becomes a balancing act of two major priorities — balancing product development versus the risk of managing the runway of your funds to continue the operation.
To help you in this difficult process, this article will give you an overview of the different considerations you should keep in mind to make sure your budget helps take your startup off the ground and set it up for success.
Unless you have an extensive financial background to rely on, building a budget can be a mammoth task. For starters, it’s probably entirely new to you, so you have to learn as you go. But more importantly, building a budget is a lot of work. Here are 3 recommendations to make sure you can tackle this task in the best way possible.
If you were to ask a typical startup founder “How much money do they need?”, you would probably hear back something like “all of it”. There’s a good reason for this, that’s because coming up with a set number can be a difficult task on it’s own.
There are a couple of different approaches to come up with this amount.
An effective tool to know how much money you’ll need at each stage of your startup and how you’ll organize your budget is by making a list of nice to haves and must haves. The main reason to do this is to help you prioritize what expenses you can focus on while building your budget. Here are some areas where you can build the list.
Most startups, if any, don’t start off making sales and money. After forming the business, there may be a period of time in which you only have expenses and little to no revenue coming in. For this reason it’s important to know your best and worst case scenarios for how long it will take you to make money.
Having these scenarios planned out gives you a series of strategic advantages.
Just like going on a diet, having 100% adherence to a budget is unusual. Using our diet analogy, it’s easy to stick to a diet when everything is normal, but then something happens. It can be the holidays, a family reunion or any number of things that throw your diet off the rails. The same thing happens with budgets. You stick with it until something breaks, or you need to hire a new developer unexpectedly or get a consultant for a problem you otherwise can’t fix.
Now the question is, how much wiggle room should you build in? A good rule of thumb is between 10% and 15% per each line in your budget.
Having this little bit of wiggle room will give you the peace of mind that if something doesn’t go exactly as planned you’ll still be able to recover from it and not have to put out a fire.
This is typically a problem that startups with substantial funding come across, not to say bootstrapped startups don’t have it. This problem is burning through your budget way too fast.
In all fairness, no one goes out with the goal to burn their money. Going through your budget too fast is often the result of a failed strategic decision. It was a compromise or risk that was taken on in order to try to get a bigger payoff.
There’s nothing wrong with adapting your strategy. Rather the idea is to have the awareness of where the biggest threat to being able to stick within your budget comes from. With this in mind, here are 3 areas that are usually responsible for burning the most cash.
Note: Another common pitfall is failing to prepare for tax season. Startups, even those with no profit, will need to file taxes. Depending on the complexity of your situation, this will require professional help (to avoid common tax issues).
For most startup founders, creating a budget is the part they look forward to the least. That’s because founders are typically focused on their vision. And that’s why budgets are perceived as a limitation to what you want they want to achieve.
If you approach budgeting with the right mindset, you’ll realize it’s the tool that will make it all happen.