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- Budgeting and making financial predictions are known to be intimidating to first-time founders, so we've broken it all down into a step-by-step strategy. In general, your north star should be to create a budget that allows you to predict your startup's expenses, track your cash flow, and stay scrappy from the outset.
- You can use third-party accounting software, a budget template for a startup business (e.g., a startup budget template on Google Sheets), or more manual methods to prepare a budget for your tech startup.
- In order to create a budget, assemble your resources and make a budget plan, prepare a list of your startup costs, calculate your fixed variables, calculate your variable expenses, determine your monthly revenue, and, finally, go through your expenses and make any adjustments that seem necessary.
- You don't have to estimate costs to the tenth of a penny or forecast the future perfectly to make a good startup budget. Consumer research, industry intelligence, and vendor quotations are all common ways for an early-stage tech startup to forecast data. You may already have some of these figures as a result of your investments in R&D while developing your product.
- The most essential thing to keep in mind is to keep your estimates and predictions conservative. It is wiser to underestimate income and overestimate expenditures rather than the other way around.
- Your budget turns into an analytics tool once your tech startup is fully operational. You should be able to observe how you're distributing resources in real-time and if the team is spending and earning the way you had planned. This allows you to ask key questions and identify cost-cutting and business investment possibilities early on.
In the early stages of a startup, each dollar counts. If you're like the majority of early-stage startup entrepreneurs, you're starting off on a shoestring budget of less than $50,000.
Many startups have no option but to engage in rigorous growth-hacking tactics in order to achieve the largest effect with the least amount of money. That leaves little leeway for sloppy budgeting or unexpected cash shortages. However, according to one poll, 61% of early-stage startup founders/business owners did not have a formal budget in 2018.
Budgeting and making financial predictions are known to be intimidating to first-time founders, so we've broken it all down into a step-by-step strategy. In general, your north star should be to create a budget that allows you to predict your startup's expenses, track your cash flow, and stay scrappy from the outset. You can use third-party accounting software, a budget template for a startup business (e.g., a startup budget template on Google Sheets), or more manual methods to prepare a budget for your tech startup.
What is a Startup Budget?
A startup budget is a straightforward map of how you intend to spend the startup’s funds and meet anticipated expenses.
A budget is essential regardless of whether you're an early-stage or a later-stage tech startup. It’s the most effective tool for calculating the funds you'll need in the first few quarters of your company’s life before you properly debut in the market. It will be a combination of reasonable projections based on market surveys and your best predictions at this stage. If you don't follow the budget, you might risk running out of funds too soon or wasting money.
Your budget turns into an analytics tool once your tech startup is fully operational. You should be able to observe how you're distributing resources in real-time and if the team is spending and earning the way you had planned. This allows you to ask key questions and identify cost-cutting and business investment possibilities early on.
How to create a tech startup budget?
You don't have to estimate costs to the tenth of a penny or forecast the future perfectly to make a good startup budget. Consumer research, industry intelligence, and vendor quotations are all common ways for an early-stage tech startup to forecast data. You may already have some of these figures as a result of your investments in R&D while developing your product.
The most essential thing to keep in mind is to keep your estimates and predictions conservative. It is wiser to underestimate income and overestimate expenditures rather than the other way around.
Let's look at how to determine your income and expenditures, examine the data, and implement modifications.
Assemble your resources and make a budget plan
Spreadsheets aside, you could even make your startup budget in a notebook. Alternatively, use the budgeting functions of popular corporate accounting software vendors to expedite the process. This way, your generic budget will update automatically if you link any financial resources, such as your corporate banking account. There's no need to sift through each application to figure out how much money you've spent on a monthly basis.
Another consumer-friendly budgeting alternative is a spreadsheet tool like Google Sheets/Microsoft Excel. There are a plethora of free startup budget templates available to use online. Choose one with a user-friendly interface and to test the formulae, enter some figures into the spreadsheet. With this approach, you won't waste hours inputting data just to discover that the spreadsheet isn't working like you thought it would.
Setting a financial goal ahead of time can help you keep track as you add up your must-haves and nice-to-haves. Don't forget to set aside some money for a rainy day fund. Experts suggest keeping enough cash aside to cover three months' worth of spending. Budget whatever you can for contingencies, even if it seems out of range at first.
Make a list of your startup costs
“Startup costs” are the expenditures you incur and assets you purchase prior to launching your startup. These are your most important purchases — the things you'll need to get your startup up and running and begin selling.
You'll need to budget for two types of startup expenditures:
- Assets: One-time acquisitions of liquid/non-liquid assets such as merchandise, desktops, furnishings, transportation, properties, equipment, and security deposits. It's important to remember that startup assets, often known as capital expenditures, are not really tax-deductible.
- Costs: These are the fixed/variable costs that you incur before you launch your startup. Incurred before you launch, these expenses - like rent or payroll - are termed startup costs. Tax deductions are available for startup costs.
Wherever feasible, condense each expenditure. You won't be paying a lump sum for "website expenses," for instance. Instead, segregate each cost. Identify a domain name, cloud-content management systems, online sales carts, layouts, photos, and just about anything else you might need to purchase separately.
Calculate your fixed expenses
The next stage is to figure out how much your fixed costs, also known as "overhead costs," will be. These are monthly company expenditures that are generally the same and don’t vary much. Do not forget to set aside money for each fixed cost's expenditure. If you employ an in-house social media marketing professional, for instance, you'll need to provide them with more than just a salary and perks (e.g., a 401k). They'll also need office supplies like a workstation, a computer, and marketing applications for their work.
Calculate your variable expenses
Variable expenditures fluctuate on the basis of sales and output; therefore, they seldom amount to a fixed monthly cost. These expenses tend to rise as you grow (and vice versa).
To calculate a majority of these costs, early-stage startup founders may get quotations from suppliers, contractual employees, and third-party logistics vendors. Alternatively, you could use the standard costing of the industry. Take into account how the time of year and season influences each expenditure.
Pro tip: Round up all fixed/variable costs to offer your budget some breathing room. For areas that vary, such as marketing and sales or legal assistance, some experts recommend doubling (or sometimes even tripling) predictions.
Determine your monthly revenue
For each category of revenue source, you must anticipate your profits. It's ideal to produce at least two sets of revenue predictions if you don't have historical sales data for your startup, one will be an ambitious forecast while the other will be a more cautious forecast.
Predict the number of times your clients will purchase your products or/and services. Assess your entire customer base, market dominance potential, and present market circumstances. Your break-even analysis may also be used to calculate a monthly sales projection. Be honest with yourself about any variables that could impede your monthly income growth.
A list of possible revenue and funding streams are as follows:
Go through your expenses and make any necessary adjustments
Determine how much you'll need to get started by entering your monthly expense projections into your budget. Ideally, you've budgeted for over-expenditures and contingencies.
In the initial months of a new startup, it's reasonable to expect some degree of budget deficit. However, if your budget target looks much better on paper, you might want to propose - and implement - adjustments before going off to borrow extra funds.
Go over your costs again and categorize them as either “important” or “nonessential." The “important” expenses are self-explanatory; the “nonessential” expenses are expenses that are not absolutely necessary to your growth and survival. Starting with the “nonessential” category of expenditures, determine which expenditures you can eliminate, decrease, or save for afterward.
Benefits of having a budget for a tech startup
It's not only about avoiding early financial blunders when you create a startup budget. In the long term, budgeting aids you in making well-informed judgments. Here are a few additional reasons why tech companies should schedule time for budgeting:
- You could better determine when to recruit employees, purchase equipment, and/or make other investments in your startup.
- You can finance growth more sensibly by assessing real business data and avoiding premature fundraising or overfunding yourself.
- You'll be able to properly calculate your break-even point and subsequently make necessary adjustments.
- You can better anticipate cash shortages and then set aside funds or/and bargain with vendors and creditors ahead of time.
- You can anticipate retained earnings and devise a strategy to deal with them.
- You can use extra funds to supplement your startup's contingency reserve.
- You can create reliable financial documents, such as a balance sheet or income statement, to present to your investors and lenders.
Limitations of having a budget for a tech startup
- Budgets can only be as good as the quality of information that goes into their creation. Budgets can quickly become useless due to inaccurate or unrealistic projections.
- Budgets can limit decision-making freedom.
- As conditions change, budgets must be adjusted; this might take the form of a recurring process that could be cumbersome for founders.
- Budgeting is a time-consuming process. in large corporations, entire departments may be devoted to budgeting and oversight, but in startups, such extensive manpower is generally a luxury.
- Budgets might lead to founders making impulsive short-term decisions in order to stay on point rather than going with the best long-term option that goes beyond the budget.
- In the worst cases, founders and executives might become excessively concerned with creating and revising budgets to perfection, losing sight of the fundamental concerns of hiring right, building the product, and gaining new consumers.
Building an initial budget is an early-stage startup's first line of defense. It's an adaptable action strategy that enables you to foresee financial shortages and better adjust to changes. And if tech startups make the effort to create a properly-defined budget, they'll already be ahead of about two-thirds of the competition. The balance sheet and P&L statement are, by far, the most critical financial records for any business. Have your bookkeeper produce them on a regular basis and discuss them at your board meetings. Your budget should have the same structure as your profit and loss statement, but with forecasts rather than actual figures. You would want to observe how your revenue rises in comparison to your costs at a high level.
The revenue portion in the budget of a B2B SaaS business should track:
- New customers
- Existing customer upselling
- Current business renewals
Your expenditures should be broken down by the number of hires:
- Salespersons: To generate additional business
- Marketers: To generate new leads and cultivate existing ones
- R&D (Engineers) - To correct flaws and improve the product/service
- Customer success managers - For onboarding customers and keeping them pleased in order to increase loyalty and upsell better.
Fixed costs like founders' payroll and General and Administrative (G&A) expenditures are likely to demand relatively less detail. However, you must keep an attentive eye on the bottom line every month, as it shows the profit/loss as well as the cash reserves. You would do well to remember that capital is the lifeblood of your tech startup; without adequate capital, it will perish sooner rather than later.
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