Managing Your Startup Budget the Right Way

At the startup stage, managing your budget can be challenging. But it is critical that you manage it effectively. More often than not, I meet startup founders who think they manage their budget well, but in practice, their budget lacks the basic characteristics that will allow them maximum control, constant improvement and great relations with their shareholders.

Here are a few tips on how to do it right…

Following are five important principles startup founders must remember in managing their startup budget. To make them easy to remember, let’s call them “DACAD”.

Details (D) – Make your budget detailed. This is especially important for the 18 months ahead of you at any point. It is important for two reasons:

• Details tell you precisely how much you need and for what.

• You can clearly show your investors how you are planning to spend the money

Annual (A) – Draw up your budget on an annual basis, from January till December of each year. It is even better if you can keep updating your budgets on a rolling basis. That means, around June, when half the year is gone, try to budget for the next six months also, from January to next June. This will help you monitor your cash burn rates and how long you can survive with current funding levels. Also show the monthly budget.

Cash Flow (C) – Cash flow is the most important element in a startup budget. It is important to draw up a separate cash flow statement in addition to your profit and loss statements. Your Profit & Loss statements don’t always reflect the cash flow status. But knowing exactly how much money goes in and comes out of your startup bank account is essential for managing your budget.

For better control over your cash inflows and outflows, aim to do the cash flow statement on a monthly basis as well.

Actual Vs. Planned (A) – Draw up your startup budget documents to help you track actual cashflows, costs and revenues against the budgeted ones. Try to do this not just for the year, but also on a monthly, quarterly, half-yearly as well.

Over time, slotting in the actuals against the budgeted items will help you identify the variances. And hopefully you can fix them as time goes along and learn from your mistakes. Unless you do this on an ongoing basis, you will not spot the variances until after the year end, when it is too later.

Also, monitoring your actual against planned items helps build credibility with investors and other stakeholders.

Dependencies (D) – Many items in your budget are dependent on others. Draw up your budget file in a way that reflects all these dependencies. When one parameter in the budget changes, all the other items dependent on it should also change automatically. This will help you avoid having to recalculate everything and help you avoid costly mistakes.

There are many advantages of following the DACAD principles when you draw up and manage your startup budget:

• It helps you control your cash better

• Makes it easy to monitor company activities

• DACAD budgets will help you develop a high level of trust between the founders and investors

• It also allows you to constantly improve your operations and budgeting

If you would like professional help in creating and/or managing a “DACAD Budget”, we are happy to help.

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