In our latest FinOps seminar, we brought together three FinOps experts to talk about budgets.
We focused on:
Our experts are:
Your budget is a finance plan that everyone in your organisation will work towards. It will engage individuals and teams across the company, as well as external stakeholders and investors.
There are several reasons for building a budget, but they fall under two key umbrellas:
Normally, you will perform these two types of budgeting a different times. In many instances, companies build a budget for fundraising, but then scrap it to pave the way for an operational budget.
Remember: your operational and fundraising budgets can be different but they must tell a cohesive story.
It may seem a bit strange if you’re in a boot strapped business with no cash to be talking about budgets. However, you’re likely to need to build a financial plan before you can go out and get funding from investors.
There are five essential components to any budget:
These components will make up the structure of your budget and give you something you and your stakeholders can agree to.
Let’s look at these components in turn and understand how you bring each one into your budget.
Pick a time period to start working on – one that is relevant to your business at its current stage. You may only want to think about the coming month ahead, or you might be starting to put in place a five-year plan for investors.
Think and then put down the key milestones and timings for your company that your budget will need to reflect. You can also think about the dream you want to sell to investors.
You will need to pin down the founder or the leadership team and help them agree on a few milestones. It’s not set in stone, however. Assure them that things can change. You just need a starting point. Remember, you are driving the process of establishing a budget, not waiting for them to tell you their plans once they’ve already started carrying them out.
Here are some of the things you will need to know about:
Essentially, your financial plan is the translation of the business plan into Excel (or whatever software you’re using), so you need to use the latest and most accurate data.
Your KPIs are vital for understanding how your business works and is the cornerstone to producing practical financial planning and analysis (FP&A) in the future. It’s critical to ‘get under the bonnet’ early and try to work out what drives your company’s financial results and how you expect them to change over time.
Here’s how to discover the metrics you need to focus on:
Examine your costs over the proposed time period.
A sizeable proportion of your costs will be fixed overheads, but with built-in step changes, such as a new office. Some costs will grow with staff numbers as your business expands. Cost of sales is affected by gross margin.
Forecasting your revenue over your chosen time period is the big puzzle of budget setting.
It’s going to be an educated guess. As long as your estimates are backed up and supported by reliable data, it’s good enough.
Work with your founders or the leadership team and your sales team to decide who owns each part of the revenue model. Get agreements upfront on who is responsible for hitting each target.
Remember: it's better to have something than nothing. You'll never regret starting your budgeting today!
The right software for your budgeting initiative depends on the stage of your business. If you’re just starting out, investing in the kind of bespoke accounting packages used by large multinationals is clearly a waste of money!
Software is there to help you with the budgeting process, not do it for you. Here are the things that software can do:
It’s not there to put people out of jobs or take over the process. Bringing new systems into your company is just one part of the transformation as your business grows. You need to have your building blocks and core data and systems in place first. People will still have the lead role in decision making. They will need to interpret the data the software generates. People will be incharge of setting goals, not the other way around.
If you implement the wrong software at the wrong time, it can add to the confusion rather than solve it, especially if you don’t know how it works under the hood. For example, with predictive analysis, you need to understand why and how it gets to the predicted number.
For startups, spreadsheets are helpful as they are simple to customise and share and are low cost. However, as your company grows, your spreadsheets will struggle with the volume and will begin to creak.
Bringing in new software takes time and costs money, so it’s best to look at it as a Return on Investment (ROI).
Remember: software is an enabler, not a replacer.
I hope this article has been helpful as you build your budget.
At Quantico, we’re a team of FinOps experts. That’s Finance Operations – where finance, operations and technology meet. We provide in-house finance teams to fast-growing businesses just like yours, giving you the systems you need to scale without the admin and hassle.
If this sounds like the way forward for your business, visit our site today.