Better Budgeting

For many young founders, managing finances can be a massive headache. You have just closed a successful fundraise and now need to figure out how to spend the money wisely. Everyone has their hand out for resources and without a solid infrastructure to measure ROI, it feels like a free-for-all. You want your team to make prudent investments, but it often feels like you're the only one who's concerned.

Sound familiar? You're not alone in this, and fortunately, I've got some insights for you.

Let’s start with some budgeting methodologies.

Have you tried market-based budgeting? This approach uses the profit and loss statements of similar public companies to define a standard of spending for each department in your business. Here's a quick rundown of how it works:

Market-based budgeting

1. Research similar public companies and check their profit and loss statements
2. Estimate your revenue for the upcoming year.
3. Then ask your Sales team what resources they need to achieve the projected revenue. If it aligns with the established comparable percentages, give them the green light.
4. Next talk to your Product and Engineering teams. Ask them about the resources necessary for building key features that will drive your projected revenue. If their requests align with the comparables, they're all set.
5. The remaining departments get a budget. This budget represents a Euro / Dollar value, not a headcount, so you're not just hiring expensive staff but optimizing for value.

There is another model called:

Outcomes-based model

In this system, team members need to pitch their financial needs, similar to how you would pitch to an investment firm. The pitch must include expected results from the investment. If you're convinced, allocate the capital. But remember, this comes with a regular check-in (usually monthly), where they must report their progress. Each person gets scored on their ability to deliver their projected ROI. High scorers earn more access to capital.

Remember to make allocations in Euro / Dollars, not headcount. If you allocate based on headcount, you might end up with teams hiring the most expensive personnel rather than the most effective ones. Amazon and several other big companies use this model for their Budgeting.

With all that said, the outcomes-based system has its flaws.

Downsides

• When the expected outcomes don’t materialize, finger-pointing begins.
• Holding department heads accountable becomes challenging as firing them is often too drastic (and they know it).
• Achieving a meaningful score for a department head can take several iterations (and each iteration can take a year if you budget annually).

What’s important to remember, is that no system is perfect. The key is to find a method that works best for your startup.

So, we've discussed the methodologies behind budgeting, but let's not forget the people behind the numbers.

Involving Stakeholders

Involving stakeholders (employees, investors, board members, etc.) in the budgeting process can increase transparency, boost morale, and promote a sense of ownership. It also provides an opportunity for various perspectives and ideas to come to the surface, potentially enhancing the overall financial plan. Integrating the steps below into your budgeting strategies could be a game-changer:

1. Open Communication: Start by fostering a culture of open communication about your startup's financial status and goals. Share information about how the company is doing and where you want to go.
2. Decision Making: For significant budgetary decisions, include key stakeholders like board members and major investors. Their business acumen and outside perspective can be beneficial.
3. Rewarding Fiscal Responsibility: Implement a system of rewards for teams or departments that manage their budgets effectively. This encourages everyone to be more financially responsible.

In addition to methodologies, there are also tools available that can assist you in managing your budget.

Financial Software

Many of these platforms can help automate the budgeting process, track spending, provide real-time financial insights, and offer other financial management features. This could alleviate some of the pain points, such as the difficulty of tracking ROI and managing resources. In addition, software tools can offer more transparency for all team members regarding the company's financial status and can aid in creating a culture of financial responsibility.

Here are some tools that you can use:

Scoro:

• Budget planning and forecasting
• Financial reports and analysis

Centage (for bigger companies):

• Budgeting and planning
• Forecasts
• Financial dashboard and reporting

Prophix:

• Budgeting, planning, and forecasting
• Financial, statutory, and management reporting
• Cash flow planning

To wrap things up, remember that budgeting isn't a one-size-fits-all approach nor is it a task you should dread. Embrace the different methodologies, involve your stakeholders, leverage the power of financial tools, and most importantly, create a culture of financial responsibility within your startup. No matter where you are, taking a proactive approach can be the key to steering your startup toward sustainable financial health.