As we get ready to close out 2020, planning your 2021 startup budget becomes more critical every day. While it’s important to take a little time to look back, your focus should now be fixed on what’s to come. And given what we know now, 2021 could be a challenging year.
The purpose of setting up a budget is to create a roadmap for your organization. While you can’t plan and predict everything, budgeting is a critical step in making sure your business is headed for success. Take time in advance to set goals and make the big decisions necessary to achieve these goals.
Here are seven tips to help you build a successful 2021 startup budget.
- Make sure to look forward
- Set aside enough time
- Don’t be a perfectionist
- Follow up on your plan throughout the year
- Have a plan for taxes
- Figure in some flexibility
- Be realistic and consider your business cycles
Keeping these points in mind will help you have a successful year no matter what happens.
1. Make Sure to Look Forward
As we roll into the holiday season and wrap up this year, it’s important to make an objective assessment of your current position. You may realize that 2020 didn’t turn out the way you would have liked.
Although that can be a difficult realization, now is the time to focus on the future. Even if 2021 proves to be challenging, you want your startup to continue into the following year.
The best way to ensure that is to begin with the end in mind. Start by thinking of your budget as a roadmap to where you want to be in 2022 and beyond.
- What are your 2022 revenue and profitability goals?
- What investments are necessary now?
- What types of expenses and structures do you need to achieve those goals?
Focusing on your mid- and long-term goals will improve your budget for 2021.
For example, if you’re planning to triple your sales, you may need to ramp up your marketing budget and expand your operational team. In turn, these increases may mean making difficult choices in other areas. Make those choices early on and decide now where you’re going to go, it can help avoid wasted efforts and expenses.
2. Set Aside Enough Time
As your roadmap, the objectives you define now will influence everything you do in the coming year.
Of course, the amount of time necessary will vary depending on the size and maturity of your organization. It could be a quick couple of hours, or it could take several weeks. You should note that many major corporations spend months planning the following years’ budgets.
Once a working version of the budget exists, take a few hours to present it and discuss it with the entire leadership team. For the roadmap to be successful, you’ll need their buy-in. In the end, they are the people who will be executing the plan.
It’s worth investing some time up front. Rushing through the exercise now can lead to headaches and heartaches in the following years.
3. Don’t be a Perfectionist
On the other hand, don’t spend too much time counting every bean, adding up every nickel. More often than not, a “perfect” budget ends up being perfectly wrong. This doesn’t mean that the figures don’t add up, but rather that you plan from a high level perspective.
When creating your budget, be pragmatic and focus on the three things that matter the most:
- Revenue
- Cash Flow
- Costs
Break down your costs into major buckets and plan generously. And don’t forget to make a cash plan.
Recognize that even the best business plans will change throughout the year. Markets are dynamic, competitors can come (or go). Your best sales guy could quit and take his clients with him, leaving you with a major hole in your organization AND in your revenue.
4. Follow up on your Plan Throughout the Year
Creating a detailed budget and then never looking at it again is a sure way to waste at least a few hours.
Imagine going on a road trip. You’re taking your family out to the coast, to a new beach you’ve never been to before. You’re not going to start driving and hope you see the right signs. You wouldn’t dream of it. The modern traveler has the GPS on, plotting the quickest route and tracking the entire trip.
Since your budget serves as your roadmap – your GPS – you should plan to check in with your budget regularly. Monthly is a good interval. This allows you to identify gaps and aggressively bring them under control. Remember that you’re probably dealing with a fixed pot of resources – overspending in one area needs to be compensated in others.
And of course, if your business structure has changed, don’t be afraid to revisit the entire plan. It doesn’t make sense to constantly compare to an irrelevant baseline.
5. Have a Plan for Taxes
Failing to have a tax plan can make your business fail. Not paying the correct amounts by the deadline can lead to fines and fees, both of which cut into your profit and cash planning.
The bottom line is, if you’re making money, the IRS wants its cut. Set aside cash to make quarterly payments based on your revenues and expenses roadmap. Be conservative in your planning to ensure you’re not scrambling around at the last minute at the end of the year to pay your taxes.
If you’re not an accountant, work with a tax advisor. They can help you maximize your deductions to ensure you’re not paying more than necessary.
6. Figure in Some Flexibility
Things change, the world can be extremely dynamic. For many, this became painfully clear in March of 2020 when the world essentially shut down and no one knew when it would reopen.
On the other hand, change doesn’t always need to be a negative. New and exciting opportunities arise every day. But sometimes these opportunities require investment in marketing, manpower or equipment.
Make sure you’re operating with enough flexibility to handle unexpected — positive and negative — without needing to go to extremes (e.g. take on unexpected debt).
7. Be Realistic and Consider your Business Cycles
Businesses are often cyclical. Many retailers and ecommerce stores do most of their business in the last quarter of the year. A garden store, on the other hand, does most of its sales in the spring. Both of these types of businesses tend to invest heavily in inventory well in advance of the sales, which can drive cash consumption.
Whether it’s to invest in material or employees, be aware of how your business cycles drive your cash requirements.
Not having enough cash at the right (or wrong!) time can be very dangerous. It could spell the end of your business, cause you to take on a partner, or require you to borrow money at unfavorable conditions.
Preventing this type of surprise is one of the key objectives of budgeting.
Furthermore, be aggressive when planning your revenue expectations, but not unrealistic. While anything can happen, quadrupling your revenue without increasing your cost structure might not be feasible. It’s always good to do a sanity check and make sure your assumptions line up with each other.
Get the Most of your Startup Budget
Maintaining a healthy business requires good money management and solid accounting practices. Another piece of the puzzle is having a solid budget — a roadmap to help you reach your goals even in challenging times. An accounting service like Pasquesi can help you prepare your business to achieve these long-term goals.