Planning how to allocate a budget within a brand new business is a tricky matter. 13% of startups report that they run out of cash too quickly, which can lead directly to the downfall of a business. Another common problem is having money, but allocating it with poor planning and judgement. Do you really want to risk the future of your startup through something as fundamental as bad budgeting?
Do budget for the outcomes you hope to achieve? Do you plan realistically for investment and borrowing? Do you really know how much it will cost to hire the staff and offices you need?
Failing to plan properly is a surefire way to guarantee that you will have money worries sooner rather than later. It also doesn’t impress investors and partners if they can’t see where you hope to be financially and how you intend to get there.
We found that there were five key factors that tripped up new businesses when trying to manage and plan budgets. We’ve listed the top offenders here, with a bit of advice on how best to avoid them.
1. Not having a strategic budget
Some startups are bootstrapping from the start, while others attract millions seemingly within weeks. Whichever end of the spectrum you are at, if you fail to be strategic, you can easily lose track.
Think of a tech startup that has received early investment, for example. The business could easily get carried away and spend it all on flush offices and expensive equipment. This doesn’t acknowledge that it needs to cover wages and costs in the future. There may be little cash incoming until a product or service is launched, so investment money or loans have to cover everything.
The solution to this is impeccable planning. Look to the long-term and don’t get overexcited when investment money or loans hit your bank account. Think strategically, make balance sheets, and stick to them, remembering to factor in the gap of income.
2. Underestimating the costs of starting up
Even if you gain customers immediately for your product or service, by the time you have invoiced them it may be up to 90 days before you receive payment. And immediate interest is not guaranteed. You might spend months developing your offering before seeing any paying customers.
Whether you are starting up with savings, loans or investments, you should come to terms with the fact that those first incoming payments may be a long way off. Budget for the most important items and stay strict with your spending.
If, for instance, a software firm hopes to get paying clients in three months, they have to factor in more than three months’ wages and office costs. Hoping to have a customer by month three doesn’t necessarily mean you will have a customer by then, of course. In addition, you may end up offering your first few customers a discount as your software is tested. And even if you get paying customers when you hope to, their payment may be delayed if you offer a freemium model or invoice after providing the service.
The solution to this is again planning and seeking extra investment if necessary. Sure, have high hopes for how many customers or clients you will gain, but factor in the possibility that customer onboarding and retention may be harder than you expect. Plan for worst-case scenarios, and hope for better ones.
3. Underestimating ongoing costs
A survey of small business owners found that one in three underestimated how much it would cost to keep their business operational on a month-to-month basis. Areas such as office rent and staff costs were taken into account in their budget, but other costs such as packaging and insurance are often left to the wayside and can really add up.
Take, for instance, a food stall serving festivals that have planned for staff, raw ingredients and petrol. That’s everything right? Well, they haven’t factored in liability insurance, for their food van, or pension contributions. Money will soon become an issue.
To prevent this from happening, take a realistic, 360-degree look at your business and account for as much as you can in your planning phase. Speak to similar businesses to see what they underestimated or didn’t account for, and check other companies’ public accounts if relevant to your business.
4. Setting the wrong prices
The way startups price their products and services can be a bit hit and miss. Many tend to be overly simplistic, just calculating costs and adding a bit on top!
Perhaps you are starting to sell handmade products. You calculate the cost of your raw materials, add the time it takes to make the items, and add profit. What you may not consider is the time you spend packaging items, dealing with customer enquiries, or queueing in the Post Office.
Take into account the time and resources you will use to run the rest of your business and look at the value you are offering, too. High-quality products can attract higher prices, so competitor analysis doesn’t always compare like with like.
5. Not having a contingency plan
A lot can change in a short period of time in the startup world. Your exciting new client may change their mind and go with another company. Your product might turn out to have a fatal flaw that requires three further months’ development time. This means your budget might change too.
A digital marketing agency, for instance, may land its first new clients in its early months. Due to the nature of online marketing, however, they may not be able to demonstrate immediate results. If the agency has failed to tell clients that results can take time, it may lose them to competitors.
There are two key ways to prepare for this eventuality: give your clients and customers realistic expectations – even potential bumps along the road. This will prevent them from becoming disillusioned or from leaving you stranded. It’s also important to have an emergency contingency fund just in case you need a bit extra.
So there you have it, the most common budgeting mistakes made by startups. With preparation, planning, and a realistic outlook, you can ensure your business avoids the mistakes we always see. If you fancy more insight into the startup world, or want advice on any other real-life business challenges, check out our blog.