Whether you’re pitching for financing, planning cash flow, or galvanizing management around a big move, your startup budget tells the story. How you organize your financial thoughts can help—and hurt—your business.
There is a ‘why’ to budgeting.
One way that I help startups succeed is by guiding a founder in creating the most accurate budget for their startup.
Elements of a startup budget
Before opening Microsoft Excel or Google Sheet, it is important to understand what you want to gain from your budgeting exercise. To build a solid budget, ask yourself, what do you want to get out of it? You want to get to the ‘why’ of your budget.
Do you need this budget to pitch?
Are you doing this for your management team?
Is it so that you can sleep at night?
Your model will meet your goals when you know why you’re budgeting and accurately include the necessary elements. You can be confident that your budget model’s essential elements will produce the desired outputs.
What are the common elements of a business budget?
The common elements of a sound budget—like a character arc of a good book—are ones you’ll be developing over the entire life of your business. Before we get into budget elements, it’s important to note that they’re not always included in a startup budget.
What startup costs are common elements of a budget?
Cost of sales:
Startups may not have revenue for some time, but you do have costs associated with producing a product or delivering a service (e.g., cost of sales ). For example, eCommerce startups have distribution costs, and toymakers have direct materials (e.g., raw, consumables, unfinished parts) and direct expenses (e.g., material costs).
Operating expenses (OPEX):
Unlike Costs of Goods, OPEX are the expenses of running a business, not specifically related to the sale of the product. For example, a company’s telecommunications bill is not directly associated with making a sportswear line or creating a website for athletic brands, but phones are essential costs.
Salary, federal, state, and local employment tax, and workers’ compensation insurance are personnel expenses that every business must include on a budget. Even without revenue, it’s smart to plan for Employee #2.
Capital expenditures (CAPEX):
Purchases (e.g., computer hardware and software, delivery trucks, storage space) that contribute to building your business and impact operations for more than a year are capital expenditures. CAPEX is considered (and recorded) an asset on the balance sheet and moves through the income statement over time as depreciation or amortization.
Accuracy doesn’t come out of a template
There are thousands of budget templates, but they do no good if the budget model isn’t correct. As an example, annual subscription revenue compared to monthly subscription revenue are two different storylines of a business and have two different accounting treatments. You need a why and a budget model that reflects your business accurately.
Tips for structuring your startup budget in Excel
When I work with founders on designing their budget, I ask them to tell me their story with words and then use numbers to retell it. Form and function are linked. That said, there are some principles to designing a budget for your business that makes it easier to find the right words and numbers.
Architect, don’t accumulate
Budget architects resist the urge to add tabs for one-off items, and the model should be built with areas for each item and then linked and treated correctly financially. Let’s say that you downloaded a small business budget sheet, but you have research and development costs, and you add a tab. You have many capital expenses, so you add another tab to your budget.
Accumulating tabs without relating (linking) them to each other using a schema will cause the financials to be wrong. Adding tabs may lead to an inaccurate representation of your business performance. An architect won’t add a door for every possible foot pattern but rather designs comprehensively.
Your startup budget in Excel may or may not look like this:
Create all tabs equally
Format each detailed area tab in a similar structure consistent for the information to correctly capture and calculate the necessary financial impact. Repeat the detail in tabs for a monthly view, quarterly, and (if needed) annually.
Build your detailed areas to make sense to anyone unfamiliar with your business and budget model. For example, headcount detail rolls up to operating expenses or benefits are by personnel types and location. CAPEX rolls up to depreciation on the balance sheet and cash flow statement. Marketing expenses apply to leads for new client revenue.
A little Excel magic
Now that you know the major elements and the audience for your startup budget, how do you paint that picture for your managers or potential investors? Excel makes linking your company’s revenue detail tab to your summary budget easy.
Remember the following as you build your budget in excel:
~ Create a schema (or instructions with step-by-step guidance on inputs and outputs) with tab linkages.
~ Some cells are inputs (add data), and others are outputs (displays calculations).
Outputs of your budget
It’s imperative to diligently maintain (update actuals) and regularly review your budget and report against it to demonstrate business performance and value.
What are budget outputs?
Budget outputs need to start with critical financial reports (e.g., profit and loss, balance sheet, and cash flow statement). Eventually, financials can be developed to include operating expense details, board-level detail, and a summary breakdown of key performance indicators (e.g., MRR, ARR), and KPI trends.
One final thought on startup budgeting with excel
If you take only one thing away from reading this article, I hope it is this:
“Keep your desired outputs in mind from the start of building your budget.”
Whether you build a budget from scratch with Excel or download a template to budget, you can’t do it accurately without knowing the ‘why’ of your budget.
All the founders I’ve helped develop their budgets—in words and numbers—have aha moments. I’m here to help, whether you have a blank spreadsheet or need a sounding board.
Rooled CFO services help founders articulate their ‘why’ every day. Let’s talk numbers.
About The Author
Jeff Whipple is co-founder of Rooled, a company built to provide accounting and financial support to help startups and their founders. A Silicon Valley veteran, Jeff brings three decades of experience in finance, including fifteen years of advising venture-backed startups as CFO-in-Residence. His industry expertise spans enterprise software and hardware, manufacturing, and service. When Jeff is not guiding C-level managers toward success, he’s coaching youth football. He is a graduate of the University of California, Davis, and a proud father of three twenty-somethings.
You can connect with Jeff on LinkedIn here.