Launching a startup is extremely exciting. You’ve likely had a lot of great ideas that you’ve been desperate to explore and set in motion for a long time, and now, you’ve finally got the opportunity to do it!
Of course, it’s important to keep grounded as you move forward. A startup isn’t all sunshine and rainbows – there’s a tremendous amount of work to put in to get to where you want to be.
One of the biggest challenges most face is how to budget properly, and this article is here to help with that. Here are 10 key considerations you should be aware of!
1. Understanding Revenue Assumptions
When you first start to consider your budget, revenue should be your first port of call. Revenue represents how much money you’re generating, and before you kick things off, you’ll need a working prediction or ‘assumption’ of how much money you’ll be bringing in.
This will require extensive research, but in brief, you’ll need to investigate your market share and determine how much of it you anticipate capturing.
You’ll want working models for both your best-case and worst-case scenarios, and the reality usually lies somewhere in the middle.
2. Start Your Marketing Early
Many startups make the mistake of starting their marketing efforts too late in the game. The problem with this is that your strategy here shouldn’t be an afterthought; you can have a great product, but without great marketing, you may barely sell anything at all.
Start to develop your marketing strategy long before you launch. Approaching a marketing agency is usually your best bet initially, and later on, you could employ your own marketers.
3. Fixed and Variable Expenses
Your fixed and variable expenses define the bulk of your finances. Fixed expenses are the elements you can predict, such as rent for your building, staff salaries, subscriptions, annual surveys, and so on.
Variable costs represent expenses that change over time, such as materials, software prices, shipping costs, and so on.
These two categories should be completely separate from one another, so organize them appropriately.
4. Incidental Expenses
Incidental expenses are all the unplanned costs that build up over time and end up accounting for a significant portion of the budget (you can read a detailed incidental expenses definition here).
You can’t fully account for them because they’re unpredictable by nature, but you can plan for them so they’re not a total surprise when they crop up. It’s usually advised to set aside about 5% of your expenses to ensure you have enough to cover yourself.
5. Costs Associated with Administration and Compliance
There’s also a lot to think about when it comes to administration and compliance. Your business will need to be registered and licensed with any relevant governing bodies, and from a legal standpoint, you’ll need to understand how you’re going to manage your taxes.
There’s also the protection of your international property to consider – how are you guarding against others stealing your ideas?
These are matters at the very core of any successful business.
6. Investing in Staff
If you’re bringing on staff, you need to have all your payroll management systems sorted out beforehand. Usually, people manage payroll using dedicated software, which makes things quick and easy thanks to automated features.
You’ll also need to think about how you’re going to invest in and nurture new talent. Consider the resources your staff will need not only to do their job properly, but to support themselves as they progress further (you could look into which online courses you could invest in, for example).
7. Understanding Scalability
One of the trickiest parts of running a startup, particularly in the beginning, is understanding how it’ll scale over time.
For example, it’s important to remember that experiencing significant growth is a double-edged sword; you’ve got the potential to make a lot more money, but it’ll cost you a lot in the short term as running costs increase.
Having a foundation in the points above will help you remain stable, but always be on the lookout for other ways you can strengthen each element of the business (planning for increased budgets in tech and supply chain, for example).
8. The Importance of a Cash Flow Buffer
A cash flow buffer is essentially money kept in reserve so that you’re not running on fumes. There are a whole manner of variables that can get in the way of banking revenue, so don’t leave yourself in the lurch.
Aim to keep around six months of operating costs as a backup in case something goes wrong. While it might seem like a lot of money to hold back, you’ll be eternally grateful if you ever need to use it.
9. Get Your Tech Sorted Early
Digital technology will invariably be at the center of your success, no matter what sort of startup you’re running. For this reason, it’s critical to have everything set up properly from the start.
Identify your three most important technological investments, and choose services (such as cloud storage, cyber security, and development tools) that will scale with you over time. As your business grows, you don’t want to have to port everything over to a new system because the ones you used were unaccommodating.
10. Preventing Stagnation
One of the biggest issues any given startup faces is the risk of stagnation. Everyone starts off with bold ideas and great intentions, but little things get chipped away at and eroded over time until the business isn’t what it was.
Budget is a major factor in this, and the main way of preventing these problems is to regularly reassess. You should be revisiting your finances on a regular basis with your staff to determine whether you’re hitting targets and where to improve. These reviews keep everyone grounded and focused on the mission.
Wrapping Up
Hopefully, you now have a better idea of the most important elements of budgeting for a startup. So long as everyone is kept on the same page and shares the overall vision, you’ll get there. Good luck!
