Comments on: Why startups don’t need a budget http://anthillonline.com/why-startups-dont-need-a-budget/ Business help for entrepreneurs, startups and small business owners in Australia | Business > Innovation > Technology > Entrepreneurship - Anthill Magazine: It's Where Ideas and Business Meet. Sat, 26 May 2012 06:30:00 +0000 hourly 1 http://wordpress.org/?v=3.1.1 By: Danielle Stein Fairhurst http://anthillonline.com/why-startups-dont-need-a-budget/#comment-27395 Danielle Stein Fairhurst Wed, 27 Jan 2010 02:28:17 +0000 http://anthillonline.com/?p=23121#comment-27395 No problem - glad it was of help! Danielle. No problem – glad it was of help!
Danielle.

]]> By: Rebecca http://anthillonline.com/why-startups-dont-need-a-budget/#comment-27380 Rebecca Wed, 27 Jan 2010 00:01:59 +0000 http://anthillonline.com/?p=23121#comment-27380 Hi Danielle, When I started commenting on Anthill, I never expected to receive such practical and thorough advice. Thank you so much. I have been on your site and I am looking at courses. I think I could use one! I have also recommended your site to a colleague. Rebecca. Hi Danielle,

When I started commenting on Anthill, I never expected to receive such practical and thorough advice. Thank you so much. I have been on your site and I am looking at courses. I think I could use one! I have also recommended your site to a colleague.

Rebecca.

]]> By: Danielle Stein Fairhurst http://anthillonline.com/why-startups-dont-need-a-budget/#comment-27033 Danielle Stein Fairhurst Fri, 22 Jan 2010 23:14:00 +0000 http://anthillonline.com/?p=23121#comment-27033 Thanks, David - absolutely! Don't get me STARTED on fixed & variable costs. I realise I've probably made it sounds like all of your forecasts are based on wild assumptions but that's not the case at all. As you say, there is probably a large amount of "known" fixed costs, which you can forecast quite accurately (I mean rent is unlikely to change, right?) and then you can really spend your time focussing on the stuff you have less certainty about (usually sales forecasts!) Thanks, David – absolutely! Don’t get me STARTED on fixed & variable costs. I realise I’ve probably made it sounds like all of your forecasts are based on wild assumptions but that’s not the case at all. As you say, there is probably a large amount of “known” fixed costs, which you can forecast quite accurately (I mean rent is unlikely to change, right?) and then you can really spend your time focussing on the stuff you have less certainty about (usually sales forecasts!)

]]> By: David http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26980 David Fri, 22 Jan 2010 05:37:40 +0000 http://anthillonline.com/?p=23121#comment-26980 Good article Danielle. I was just going to offer a perspective on this. I've been involved in a number of startups (for myself and others) and found it's really useful to use budgets/forecasts to identify the "known knowns" and "unknown knowns" to keep your focus on the things that affect the business. A sales forecast for a startup is always wild guesswork. So rather than attempting it, I'd advocate putting a lot of energy into pinning down your fixed and variable costs so you know your breakeven. So, for instance, your rent, insurance, car lease, phone lines, internet connection, computer payments or purchase, office furniture, accountant etc etc can be absolutely nailed down. So put them in the budget and play with them on paper (lease of new Merc vs buying old Hiace etc). Other things like staff needs might be semi variable depending on sales. The benefit of this is that if you can get your overheads accurately budgeted, checking performance on this front is easy: just look for variants from budget and adjust. It also means you know how much money you need to get through the door each day/week/month. If you know your overheads are $X and your gross margin is 50%, once you've sold 2X you're in the black. This keeps entrepreneurs very focused ("I need to get $4,500 through the door every week..."). Without a budget, entrepreneurs will just stare blankly at the figures. Or they'll celebrate a big sale without recognising the "big sale" has only covered three weeks' of the month's overheads. Knowing accurately your breakeven (P&L and cashflow) is what's truly critical to a startup. Once you've reached it, you have a viable business and can 'relax' a little. Until you've reached it, you're just burning money. Without good forecasting of costs, it can be very hard to see where the breakeven point is. Hope this is useful. David Good article Danielle. I was just going to offer a perspective on this. I’ve been involved in a number of startups (for myself and others) and found it’s really useful to use budgets/forecasts to identify the “known knowns” and “unknown knowns” to keep your focus on the things that affect the business. A sales forecast for a startup is always wild guesswork. So rather than attempting it, I’d advocate putting a lot of energy into pinning down your fixed and variable costs so you know your breakeven.

So, for instance, your rent, insurance, car lease, phone lines, internet connection, computer payments or purchase, office furniture, accountant etc etc can be absolutely nailed down. So put them in the budget and play with them on paper (lease of new Merc vs buying old Hiace etc). Other things like staff needs might be semi variable depending on sales.

The benefit of this is that if you can get your overheads accurately budgeted, checking performance on this front is easy: just look for variants from budget and adjust. It also means you know how much money you need to get through the door each day/week/month. If you know your overheads are $X and your gross margin is 50%, once you’ve sold 2X you’re in the black. This keeps entrepreneurs very focused (“I need to get $4,500 through the door every week…”).

Without a budget, entrepreneurs will just stare blankly at the figures. Or they’ll celebrate a big sale without recognising the “big sale” has only covered three weeks’ of the month’s overheads.

Knowing accurately your breakeven (P&L and cashflow) is what’s truly critical to a startup. Once you’ve reached it, you have a viable business and can ‘relax’ a little. Until you’ve reached it, you’re just burning money. Without good forecasting of costs, it can be very hard to see where the breakeven point is.

Hope this is useful.

David

]]> By: Pooja http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26970 Pooja Fri, 22 Jan 2010 04:24:49 +0000 http://anthillonline.com/?p=23121#comment-26970 Hi Paul Thanks for the prompt reply. Just put the url as the trackback on my site. Have a nice day Hi Paul

Thanks for the prompt reply. Just put the url as the trackback on my site.

Have a nice day

]]> By: Danielle Stein Fairhurst http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26965 Danielle Stein Fairhurst Fri, 22 Jan 2010 03:18:51 +0000 http://anthillonline.com/?p=23121#comment-26965 Hi Rebecca, Yes, it's really tough to build a credible forecast when you don't really have any past experience to go on or industry data to use for an assumption like conversion rates. This is where scenario and sensitivity analysis really comes in - you can check how sensitive your revenue is to conversion rates (for example) by tweaking that one number. If your profitability is fluctuating wildly as a result of a small change in conversion rates, I'd be worried, especially if you're not that confident about the number in the first place. Ideally you’d want to see that if everything that could go wrong does go wrong – you’d maybe make a small loss. Check out this video for a quick overview of the technical methods of scenario analysis in Excel. http://www.plumsolutions.com.au/videos/video-preview-%E2%80%93-scenario-analysis-methods Danielle Stein Fairhurst www.plumsolutions.com.au Hi Rebecca,

Yes, it’s really tough to build a credible forecast when you don’t really have any past experience to go on or industry data to use for an assumption like conversion rates.

This is where scenario and sensitivity analysis really comes in – you can check how sensitive your revenue is to conversion rates (for example) by tweaking that one number. If your profitability is fluctuating wildly as a result of a small change in conversion rates, I’d be worried, especially if you’re not that confident about the number in the first place.
Ideally you’d want to see that if everything that could go wrong does go wrong – you’d maybe make a small loss. Check out this video for a quick overview of the technical methods of scenario analysis in Excel. http://www.plumsolutions.com.au/videos/video-preview-%E2%80%93-scenario-analysis-methods

Danielle Stein Fairhurst
http://www.plumsolutions.com.au

]]> By: Rebecca http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26910 Rebecca Thu, 21 Jan 2010 09:31:52 +0000 http://anthillonline.com/?p=23121#comment-26910 Hi Danielle, Thanks for the example. I just find it really difficult to assume and there isn't a hell of a lot of data on new ideas, especially conversion rates for untrialled online ideas. I guess convincing investors is partly in the delivery. Thanks again, Rebecca. Hi Danielle,

Thanks for the example. I just find it really difficult to assume and there isn’t a hell of a lot of data on new ideas, especially conversion rates for untrialled online ideas. I guess convincing investors is partly in the delivery.

Thanks again,
Rebecca.

]]> By: Danielle Stein Fairhurst http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26896 Danielle Stein Fairhurst Thu, 21 Jan 2010 05:21:40 +0000 http://anthillonline.com/?p=23121#comment-26896 Hi Rebecca, Well I wouldn't call projected revenue forecasts "fictional" exactly (and certainly not in front of your investors!) but of course they rely on certain assumptions, and if those assumptions don't come to fruition, neither will the sales forecast. I always find it amusing to try and model marketing costs – let’s say, for example you’ve got a telemarketing strategy and you wanted to get 1,000 customers for a new product through this channel. If your conversion rate (based on experience) is, say, 5%, this means you’ll need to contact 20,000 prospects to achieve this target. If you estimate it’s going to cost you $30 per prospect for telemarketing, you’ll need a telemarketing budget of $600k. Or you could work it out the other way. If you’ve got a telemarketing budget of $600k, you’ll end up with 1,000 customers. Theoretically, of course. If only it were so simple in real life! Danielle Stein Fairhurst www.plumsolutions.com.au Hi Rebecca,
Well I wouldn’t call projected revenue forecasts “fictional” exactly (and certainly not in front of your investors!) but of course they rely on certain assumptions, and if those assumptions don’t come to fruition, neither will the sales forecast.
I always find it amusing to try and model marketing costs – let’s say, for example you’ve got a telemarketing strategy and you wanted to get 1,000 customers for a new product through this channel. If your conversion rate (based on experience) is, say, 5%, this means you’ll need to contact 20,000 prospects to achieve this target. If you estimate it’s going to cost you $30 per prospect for telemarketing, you’ll need a telemarketing budget of $600k. Or you could work it out the other way. If you’ve got a telemarketing budget of $600k, you’ll end up with 1,000 customers. Theoretically, of course. If only it were so simple in real life!
Danielle Stein Fairhurst
http://www.plumsolutions.com.au

]]> By: Paul Ryan http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26870 Paul Ryan Wed, 20 Jan 2010 22:59:56 +0000 http://anthillonline.com/?p=23121#comment-26870 Hi Pooja, Just use the post url. The trackback happens automatically. Hi Pooja,

Just use the post url. The trackback happens automatically.

]]> By: Does your Startup Need a Budget? http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26829 Does your Startup Need a Budget? Wed, 20 Jan 2010 11:32:08 +0000 http://anthillonline.com/?p=23121#comment-26829 [...] http://anthillonline.com/why-startups-dont-need-a-budget/ [...] [...] http://anthillonline.com/why-startups-dont-need-a-budget/ [...]

]]> By: Pooja http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26827 Pooja Wed, 20 Jan 2010 11:12:36 +0000 http://anthillonline.com/?p=23121#comment-26827 Hi, Great article. Where can I find the trackback link of your article? Writing a blog post about it. Hi,

Great article. Where can I find the trackback link of your article? Writing a blog post about it.

]]> By: Rebecca http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26821 Rebecca Wed, 20 Jan 2010 10:24:42 +0000 http://anthillonline.com/?p=23121#comment-26821 where you say forecasting can be guesswork, does that mean that projected revenues are largely fictional? I mean how can you project the ROI of your marketing budget without handing over a good chunk of it to test various media out? Not to mention that this is before your product exists? Am I missing something? where you say forecasting can be guesswork, does that mean that projected revenues are largely fictional? I mean how can you project the ROI of your marketing budget without handing over a good chunk of it to test various media out? Not to mention that this is before your product exists?

Am I missing something?

]]> By: David Kellam http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26672 David Kellam Tue, 19 Jan 2010 06:22:43 +0000 http://anthillonline.com/?p=23121#comment-26672 Or the summary version: "Live on 2-minute noodles (authentic Raymen from the local Asian grocer for best calories per dollar) until you can afford to pay yourself. Sell useful stuff to people who need it. Spend less than you earn. Accumulate a whole pile of profit over 3 years of unnecessarily-audited financials so your bank will finally give you that startup loan (at 12% 'base rate' plus risk margin of course) you no longer need..." Or the summary version:
“Live on 2-minute noodles (authentic Raymen from the local Asian grocer for best calories per dollar) until you can afford to pay yourself. Sell useful stuff to people who need it. Spend less than you earn. Accumulate a whole pile of profit over 3 years of unnecessarily-audited financials so your bank will finally give you that startup loan (at 12% ‘base rate’ plus risk margin of course) you no longer need…”

]]> By: K http://anthillonline.com/why-startups-dont-need-a-budget/#comment-26662 K Tue, 19 Jan 2010 05:41:40 +0000 http://anthillonline.com/?p=23121#comment-26662 Excellent article - how do I get you to look at my forecast gratis? lol! Excellent article – how do I get you to look at my forecast gratis? lol!

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