Key Questions
- Do I really need to budget?
- Are there different approaches to budgeting? How can I pick?
- Do I need to hire someone to help me budget?
- What tools and systems do I need to help me budget well?
- How much time should I spend on budgeting?
- How can I make a sensible budget given the degree of uncertainty?
- Do I need a detailed budget with line items for every expense?
Start Here
Kristy Nathoo: Managing Startup Finances
(28 min video.) Kristy discusses common financial mistakes startups make. She emphasizes the importance of monitoring key financial metrics: bank balance, cash inflows, and outflows. Calculating burn rate and runway helps startups understand their financial health and avoid running out of cash. Nathoo advises against underestimating expenses, such as the full cost of hiring employees, and warns that early customer acquisition costs may rise over time. She stresses the need for honesty in financial assessments and regular reviews of financial metrics. Finally, as startups grow, it’s crucial to maintain accurate and realistic financial oversight to ensure long-term success.
Bill Hanna: How to Build a Startup Company Budget! A Step-By-Step Guide
(24 min video.) Building a startup company budget requires a systematic approach, breaking it down into steps and deadlines. Bill covers the budget creation process, including the importance of setting due dates, identifying and communicating with budget stakeholders, and building the revenue, headcount and operating expense plans.
Feras Alhous: Accounting Basics for Startups: Part 1
(4 min video.) Feras emphasizes that while a simple spreadsheet might suffice in the early stages, it’s crucial to invest in professional bookkeeping as the business grows. He recommends contracting with a bookkeeper from day one, emphasizing the value of having dedicated financial professionals manage accounts, pay vendors, and collect from customers. Feras also recommends hiring a part-time or full-time accountant or CPA, or engaging a fractional accounting and finance firm, as the business expands.
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Ben Horowitz: How to Ruin Your Company With One Bad Process (Budgeting)
(8 min read.) Here, Ben outlines how a flawed budgeting process can severely damage a company, especially under technical founders. He shares his own experience of nearly ruining his company, Loudcloud, by allowing managers to game the budgeting process, leading to bloated headcounts and unsustainable expenses. Horowitz emphasizes that starting with constraints, such as limiting run rate increases, targeting specific earnings or losses, and controlling engineering growth, can prevent these issues. By setting clear limits and encouraging managers to achieve goals within those constraints, companies can avoid cultural drift and financial instability, ultimately preserving agility and cohesion.
Joe Lonsdale: A Note for Startup CEOs on Budget Chats
(5 min read.) Lonsdale advises startup CEOs to periodically review their financial numbers, even if they are well-funded, to ensure their company’s sustainability. He emphasizes understanding monthly spend, cash flow, and having a clear picture of the company’s financial status. CEOs should know their actual cash in the bank, monthly burn rate, and projections for future spending. Using a hypothetical startup as an example, Lonsdale illustrates the importance of managing resources and planning fundraising rounds. He highlights that while financials are crucial, they should complement discussions on product strategy, marketing, and company culture. Rigorous financial oversight is essential for long-term success.
Geoffrey Moore: Managing the Marketing Budget in a Downturn
(3 min read.) While this article focuses on marketing, it brings up helpful pointers for how to manage other functional areas during downturns. Geoffrey suggests prioritizing operational excellence and minimizing waste.
Brad Feld: Budgets – There Has to Be a Better Way
(2 min read.) Brad discusses the inefficiencies and challenges associated with traditional budget planning cycles. He points out that the cyclical nature of budgeting often leads to discrepancies between planned and actual performance, especially in the third and fourth quarter.
Robert Howell: Turn Your Budgeting Process Upside Down
(4 min read.) Traditional budgeting processes often focus on short-term accounting profits and hinder long-term growth. To foster growth, companies should shift their focus from earnings to future cash flows, which is a key indicator of a company’s intrinsic value. This shift can be achieved by implementing rolling plans that extend beyond the annual financial reporting cycle, restructuring budget formats to emphasize cash flows, and changing measurement and reward systems to align with long-term growth drivers.
Bill Reichert: The Art of Startup Finance: Financial Budgeting – Your Operating Budget
(4 min video.) Building a successful startup requires a well-defined operating budget that outlines your spending and revenue projections for the next year. Creating this budget involves identifying key drivers for expenses and revenue generation, such as personnel costs and customer acquisition strategies. While traditional accounting categories can be helpful, framing your budget around key milestones like product development can provide a more strategic approach.
Bill Reichert: The Art of Startup Finance: Financial Budgeting – Your Long-Term Forecast
(5 min video.) A long-term financial forecast helps investors understand the company’s future and the assumptions behind it. While a five-year projection might seem daunting, it’s essential to personally create it to reflect the business model and growth plans. This involves building up revenue and expense estimates month by month, quarter by quarter, and year by year.
Ran Matoki: Strategic Budgeting Tips for Startups During Crisis
(3 min read.) Ran emphasizes the importance of flexibility, efficiency, and prioritization during crisis situations. He encourages startups to adopt a proactive and adaptable mindset, utilize technology efficiently, and make smart, targeted investments to navigate challenges and emerge stronger.
Jeffrey Bussgang: How to Develop Your Startup’s Annual Budget and Plan
(3 min read.) Jeffrey emphasizes aligning the budget with long-term strategic goals, setting clear objectives using frameworks like SMART or OKR, and developing realistic monthly revenue projections based on market analysis and growth expectations. He also stresses the importance of determining an acceptable budgeted loss, prioritizing spending, and involving key team members in the budgeting process. The article then explores the impact of generative AI on budgeting.
Peter Reinhardt: Startup Finance for Founders — Part I, Accounting: Bank Accounts, Credit Cards, Invoices & Contracts
(8 min read.) Peter emphasizes the importance of a secure bank account structure, particularly when a company raises significant funding. He also discusses the challenges of obtaining credit card limits for startups and how Segment was able to negotiate higher limits by highlighting their cash balance rather than revenue. He concludes by explaining the basics of contracts and invoicing for software businesses, particularly the use of Master Service Agreements and Order Forms, and the need for liability insurance.
Peter Reinhardt: Startup Finance for Founders — Part II, Strategic Finance: CFOs, Annual Prepayment, Venture Debt & Shadow Budgets
(7 min read.) This is the second part of a series on startup finance, focusing on strategic finance, which involves looking towards the future and mitigating risk to increase growth. Peter covers part-time CFOs, outsourcing financial tasks, the cash impact of annual vs monthly payments, pros and cons of venture debt, and the shadow budget approach vs traditional budgeting methods.