Why it is important for a startup to learn about budgeting & finances
Many startups fail. Not due to lack of money but due to lack of knowledge about budgeting & finances. This knowledge gives you a grip on your new company that can avoid future failure.
Every budget and forecast for the future is based on assumptions. No one can look into the future. So you never know if the assumptions will come true. The art of making a realistic budget and get a grip on your finance is to make the assumptions as plausible as possible. This is usually done based on the percentage of certainty that you can assign to an assumption.
Suppose an average baker sells 100 loaves of bread per day. You want to start a similar bakery with similar circumstances, such as the number of inhabitants and the average income per inhabitant. If you think that you can sell 10,000 loaves of bread a day without doing anything substantially different, you can reasonably say that the chance of success is less than 1%.
Financial forecasts & budgeting tips for startups
Everything starts with determining your turnover. What you can quickly get confused about as a startup is that your turnover also depends on your promotion activities. This is where the first vicious circle usually begins. How can you determine the turnover if you don't know your marketing budget yet?
Tip 1: Competitive analysis
You are rarely the first to offer a certain type of product or service. Maybe your product or service is unique, but the type of product or service is not. Therefore, find companies with similar products and services and research what their turnover was the first and second year. And how much (marketing) expenditure they have made.
Tip 2: Margin
To provide a service or product, costs must always be made. These can be purchase costs or production costs, but also logistics costs to deliver a product. Make a calculation spread over the months that looks like this:
- Number of sales or hours worked
- Average sales price per product or hour
- Average cost per product or service
- Margin per month
Tip 3: Fixed costs
Every company has fixed costs such as rent, salary, office supplies, etc. These are called fixed costs because they come back every month. Some startups want to minimize costs in the first months.
It is logical but can give a distorted picture of whether the company is or can become profitable. In a prognosis, it is therefore wise to include the costs. Whether or not you will actually make them, you can have them depend on your turnover. Fixed costs are, for example:
- Salary and management fees
- Rent (including gas, water, and electricity)
- Administration fee
- Office supplies
- Travel costs
- Car costs
- Small purchases
- Representation costs
Tip 4: Variable costs
In addition to the turnover, the most difficult estimate is to define the variable costs. These include marketing expenses and unexpected legal costs. Again, you can analyze similar companies and include the same type of costs as they do.
Note: Always include an estimate in your budget for unforeseen expenses.
Once you've gone through these steps, you'll have a fundamental forecast. Unfortunately, this does not say anything about reality yet, and there is little verification to any fact. That is why you are ready for the next step: modeling and argumentation.
How to model a startup budget.
Always ask a remote startup budgeting & finances expert at TheONE to help you to model your forecasts. Often startups are too optimistic or too pessimistic about their prognosis.
Most banks and investors want to see two budget scenarios: a worst-case scenario and the best-case scenario. It's one of the first things they will look at. If the budget is not set up in the right way, they will not support your journey.
Worst-case scenario for startups:
Try to substantiate with as many market figures as possible why everything is wrong. Besides, you predict more costs, much less revenue, and your marketing campaign is only 50% effective.
The outcome is the worst-case scenario that can happen to you as a starting entrepreneur. This is important to know because it shows the potential risk of the company.
Good case scenario for startups:
Try to substantiate with as many market figures as possible why you are doing much better than similar companies. Everything is fine, the costs are lower, and the turnover rises faster than you dare to hope for.
The risk of making a good case scenario is that you will calculate profusely. An external startup budget professional at TheONE can protect you from this.
Ask for remote advice from startup budgeting & finances professionals now, and make your first realistic prognosis and budget.
See also our article about a free investment deck template