A startup budget serves as a road map for building any type of business. Yet, it’s a delicate balance. Taking a few risks during the startup’s launch is a great strategy (and generally reaps success in the end), but maintaining a budget is just as vital.
All in all, setting a realistic budget is a game changer for any startup. It helps entrepreneurs stay on track and keep their eyes on the ultimate goal.
If a startup budget is constantly tweaked and never followed, then deep financial trouble may be up ahead. Here are four reasons why all entrepreneurs--big and small--should have a realistic startup budget.
1. A set budget helps you stay focused.
Calculating every cost in the present and future for a startup can be overwhelming, especially when there are unforeseeable expenses. However, mapping out specific costs (and, of course, setting aside funds for emergencies, too) is the best approach.
“The exercise of thinking through what will be required before beginning a project (i.e., counting the cost) is pretty ancient wisdom,” said Scott Peeples, the co-founder of peerfit. “It's not just about estimating expenses either; it can end up shaping the strategy of the whole company.”
From staffing to machinery, entrepreneurs should estimate their startup budget. Having a set budget maintains focus on what or what not to spend, reinforces the startup’s progress and perseveres toward the end goal.
2. It’s OK to adjust your budget but stick to it.
Because life doesn’t always allow people to stick to their intended goal, flexibility is key. Sometimes startup owners need to readjust their budget more than once, and that’s OK. But it’s also best to readjust focus and keep the budget in mind.
“My budget was always very loose and flexible,” said Toby Sembower, the founder and CEO of Digital Brands. “What was most important to me was that I get to work with the most talented people possible and in the best work setting possible.”
Creating a startup budget is a dynamic process that fluctuates as much as the initial goal and company do. However, adjusting the budget is just as important as sticking to the original plan. Be open to change, but remember to stick to the revamped budget.
3. Avoid a half-built business.
Running out of funds is one of the worst repercussions when an entrepreneur doesn’t set or stick to his or her budget. Half-built businesses aren’t worth much to the entrepreneur or business world, so prioritizing costs helps avoid this doomed scenario.
Budgeting is all about moderation, so startup founders should balance both their budget and spending habits. Sometimes the budget needs to be larger, or the founder should cut back on some expenses.
“The obvious consequence of failing to make a budget is the increased probability of running out of resources to meet your objective-, like ending up with a half-built house,” Peeples said. “Track your cash flow and adjust your budgets every quarter. Learn from the numbers.”
4. Don’t dig yourself into a debt hole.
Having an unlimited startup budget may seem like an ingenious idea at the time, but startup owners will dig themselves into an abysmal debt hole in the end. Businesses that set a realistic budget steer clear if that trap.
A startup business may flourish while accruing debt, but success and profitability diminish once that debt needs to be reimbursed. Calculate each expense more than once, and determine what should be the startup’s best (and most realistic) budget. It’s better to catch costly expenses in the beginning rather than in the end when swimming in a pool of debt.
“Creating a detailed budget will force you to make decisions on what’s most important, and what’s not, in spending that money,” Sembower said. “Costs can get out of hand very quickly if you’re not adhering to a budget, which could leave you short on working capital for opportunities (or costly problems) that may arise.”