Does your startup struggle with budgeting? Or even outright avoid it?
New companies lack historical information, which makes estimating financial results feel like a crapshoot. Plus, early-stage growth companies already have a lot to worry about — like building a brand and acquiring customers — so budgeting tends to fall down the priority list.
In our discussions with startup management teams, we continuously hear the same three misconceptions about budgeting:
In turn, new companies tend to assume budgeting is uninformative and useless, electing to delay forecasting until an unspecified date. That’s a massive mistake.
To disprove these common beliefs, we’ve outlined our rebuttal to each budgeting misconception below.
Yes, budgeting can be time-intensive for early-stage growth companies. Since time is a scarce resource, this is an easy and natural excuse to make as a startup. However, budgeting doesn't have to be time-consuming when you’re just getting started as a business.
We’ve seen new companies stuff their budgets with intricate and unnecessary information. Travel is a common example. You don’t need to budget for specific trips and their associated individual costs (e.g., meals, lodging, and airfare). Or, if you’re breaking out Employee Benefits into sub-items like FICA tax expenses, stop — this level of granularity doesn’t provide value. These line items aren't key expense drivers, so you don't need to waste your time trying to pinpoint every dollar.
Instead, use general assumptions — like a 24% benefit for taxes or a standard amount of T&E per employee — and adjust for accuracy later on. If you can reduce your budget from 50 line items to 25, you’ll alleviate most of the time burden.
We often also recommend timeboxing to our clients. Timeboxing is a time management process that allocates a set amount of time to an activity. For example, you could limit the budgeting process to only the second week of December. Definitive parameters will hold you accountable and ensure a timely budgeting process.
Many startups believe budgeting is futile because they don’t know enough about their operations yet to make assumptions. While your operations may not be fully fleshed out yet, it’s not a justified reason for avoiding this crucial activity.
Because a budget doesn't need to be 100% accurate. Instead, it serves as a benchmark. Having something to compare your actual results against enables you to say, “Wow, we were really off on this key driver.” In turn, you can rethink your financial expectations and strategies. If you don’t specify your assumptions now (like allocating a certain amount for consumer promotions or digital marketing), you won’t figure out what needs to be adjusted down the road.
Budgeting also helps early-stage growth companies avoid the sunk cost fallacy, which is a common behavioral bias. The sunk cost fallacy is essentially the mindset that you must continue funding a project because you’ve already spent money on it — even if the project isn’t worthwhile. A budget allows you to safeguard against this bias because you can specify fixed amounts for projects ahead of time.
Lastly, even if your operations and assumptions aren’t fully fleshed out yet, budgeting helps to initiate the discussion. It enables your team to agree on drivers and areas of uncertainty. The budget serves as a quasi-agreement between company management, ensuring everyone is on the same page.
Your budget will be wrong; that’s absolutely true. No forecast is ever perfect — but it’s still a valuable activity because you can regularly revisit and update your projections.
We recommend re-forecasting three months into the ensuing year so businesses can realign to new outlooks and operations. Again, this activity forces leadership to have a transparent discussion, helping answer the all-important question: “Why was our initial budget off?”
This analysis leads to more detailed discussion and prompts additional questions, such as:
Each member of your management team could have a different answer. Use their opinions to increase operational clarity and the odds of more accurate forecasts in the future.
Beyond these misconceptions, budgeting provides an added benefit that many early-stage growth companies don’t consider. It also enables discussions about compensation, bonuses, milestones, and goals. In turn, it doubles as a blueprint for “champagne moments” to celebrate key business wins.
For instance, your management team could agree on a revenue goal for your first year of business. A budget documents this goal and outlines a milestone to celebrate. If you don’t set the goal at the onset, you could forget and miss out on the cultural benefits of enjoying team accomplishments.
Finally, the budgeting process helps create the opportunity for the company to learn & grow. By comparing your actual outcomes to your budget, you identify specific areas for the organization to learn and improve!
A budget might seem trivial, but it’s really a catalyst for several early business processes and key management discussions. AVL helps startups compile reliable forecasts based on historical results and ongoing operations. Want to learn more? Visit our website to connect with us.