How to build and approve your startup’s budget
We are now in the midst of the budgeting season, where startups plan and approve their 2017 budgets. As a startup CEO, the annual budget is one of the main tools you have to manage your company. The annual budget sets clear goals for the employees, the management team, and the board to stand behind and do their best to achieve. It also helps align everyone involved on an objective and shared target which defines success. And most importantly, the budget is the main method to effectively manage cash reserves and cash burn to ensure you don’t run out of money.
Building a good budget is not easy, especially for companies in their early stage that don’t yet have predictable revenue streams. There are some best practices for budget planning such as What Goldilocks Can Teach CFOs about Budgeting and How to Ruin Your Company With One Bad Process. But a good budgeting process is not only about building the right budget with the management team, but also about how you communicate and approve it with the board. Unfortunately too many CEOs treat budget approval as an afterthought or something that has to be done to satisfy the board instead of leveraging the budget to have a meaningful discussion about the company’s longer-term goals.
After taking part in plenty of budget approval meetings (and many budget redoes halfway through the year) I wanted to share a few tips on how best to align and approve the budget with the board:
Timing: one of the most important things is to approve the budget as early as possible into the new year, or even by the end of the previous year. Budgets for 2017 which get discussed in the middle of Q1 leave only three quarters to execute against instead of a full year. Budgeting 2017 at the end of 2016, even though Q4 numbers are not always complete, gives management ample time to steer the company in the right direction.
Planning process: the budget shouldn’t be a surprise presented to the board for the first time the day before the board meeting. Make sure that you involve your board members (or at least the main ones) in the budgeting process to get their feedback as early as possible. This will help ensure that you are aligned on the goals and the high-level plan much before you go into the process of perfecting the budget. This will also help ensure that there are no big surprises that come out of the board meeting.
Qualitative goals: make sure that the goals for the year are clearly articulated. This should include the quantitative targets (e.g. revenue, growth) and the qualitative ones (e.g. extending the product, expanding to Europe, improving NPS). The qualitative goals should be discussed and agreed before discussing the formal budget. They are at least as important as the quantitative ones.
Longer-term plans: you can’t present a budget in a vacuum. Your annual budget is always a small part of a longer-term plan. While it is difficult and likely inaccurate to predict the numbers for 2018 when you are just starting 2017, it is important to set high-level expectations for the following year as you start planning this year’s budget. A large portion of the investment in 2017 will only yield results in 2018 and therefore it’s impossible to assess the budget without discussing the company’s two- or even three-year plan. Knowing whether you plan to continue to double your growth in 2018 or try to achieve profitability in 2018 has a material impact on the 2017 budget.
At the board meeting: the budget approval board is not a typical board meeting and shouldn’t be treated as such. One of the common mistakes that CEOs make is to go through the regular board agenda and add some time at the end to discuss and approve the budget. What ends up happening is that there is not enough time left to have a meaningful discussion on the budget and by then people are already tired anyway. While it is important to go over the previous year’s overview and all the ‘regular’ board agenda, it should be condensed to take not more than a third or a half of the board meeting. The majority of the time should be spent discussing the upcoming year and not reflecting on the previous one. This is where the board can really add value.
As the company matures, the budget becomes a more meaningful process, but it’s important to set up the right processes early on. The annual budget is one of the most useful tools you have, and one of the most important discussions you should have with your board during the year.
