The Art of Startup Finance: Financial Budgeting - Your Operating Budget

Summary

In this video, Bill Reichert discusses the importance of budgeting and forecasting for startup entrepreneurs, emphasizing how crucial it is to hit financial targets for success. He introduces the concept of milestone-based budgeting, which organizes the operating budget around key business milestones rather than traditional accounting categories. Entrepreneurs are advised to iterate their budgets regularly, especially during the early years, and balance realistic estimates with some cushion for uncertainties. Reichert also highlights the need for a 12-month monthly operating budget and gradual detail enhancement as the business grows, ensuring effective financial management.

Takeaways

• 😀 Budgeting and forecasting are critical for startup success, and missing your budget can lead to failure.
• 😀 The most common reason venture capital investors fire founders is failure to meet budget expectations.
• 😀 Instead of using generic Excel templates, entrepreneurs should base their budget on their business's unique key drivers.
• 😀 Key drivers for expenses often include personnel and tasks that need to be accomplished, while revenues depend on sales and marketing efforts.
• 😀 Milestone-based budgeting, focusing on specific business milestones like product development, is more effective than traditional accounting categories.
• 😀 Entrepreneurs should expect their initial operating budget to be wrong and must regularly iterate on it to adjust to changing circumstances.
• 😀 You should update your operating budget every quarter or at least every six months to stay on track.
• 😀 A 12-month monthly operating budget is recommended, with projections extending into the next two quarters for better visibility.
• 😀 In the early stages, detail in the budget will be limited due to lack of data, but over time, it can become more precise.
• 😀 Entrepreneurs should add a reasonable cushion to their budget, but avoid arbitrary lump-sum amounts at the bottom, as they signal a lack of understanding.
• 😀 Incorporating a cushion in the budget helps cover uncertainties but should be based on realistic assumptions for better management.

Q & A

Why is budgeting and forecasting considered one of the toughest tasks for startup entrepreneurs?

Budgeting and forecasting are challenging for startup entrepreneurs because they involve predicting the future, which is inherently uncertain. Mistakes in budgeting can lead to failure, making it a critical task.

What is the most frequent reason venture capital investors fire founders or CEOs?

The most frequent reason investors fire founders or CEOs is because they fail to meet their budgets, which is seen as a major indicator of poor management and forecasting.

What is the main goal of a CEO regarding their budget?

The main goal of a CEO is to consistently hit their budget. Successful CEOs ensure their financial projections are accurate and achievable.

What is an operating budget, and what does it entail?

An operating budget is a detailed plan outlining how a company will spend money and generate revenue over the next year. It involves identifying the key drivers of both expenses and revenues.

What is the common mistake entrepreneurs make when creating their operating budgets?

A common mistake is using a generic template or Excel sheet that doesn’t align with their specific business needs. Entrepreneurs should instead design the budget around their unique business model and key drivers.

How should entrepreneurs approach the creation of their operating budget?

Entrepreneurs should start by identifying the key drivers of their business—such as people and customer contact—before designing their operating budget around these drivers rather than using a standard template.

What is milestone-based budgeting, and why is it important?

Milestone-based budgeting is a method where the budget is organized around key milestones (e.g., building and shipping a product) rather than traditional accounting categories. It helps entrepreneurs focus on achieving specific business objectives.

How often should entrepreneurs revisit and update their operating budget?

Entrepreneurs should revisit and update their operating budget at least every quarter or every six months. Continuous adjustments are necessary, especially during the early years of a company.

What is the recommended duration for an operating budget in a startup?

It is recommended to create a 12-month operating budget, with visibility into the two following quarters to help with future planning.

How much detail should be included in an operating budget for a startup?

The level of detail in an operating budget should evolve over time. Early-stage startups may have less data to base their budget on, but as the company gains experience, more detailed projections can be included.

What advice is given regarding building a cushion into the operating budget?

It’s advised to add a small cushion around each element of the operating budget to account for uncertainty. However, entrepreneurs should avoid using a large 'cushion' number at the bottom of the budget, as this can make the budget appear imprecise.