Learning Blog > Your Budget | Your Focus (c) 2024 The Fremont Group
Friends in the startup world, please consider advice from the Fremont Group below and then return here.
If you run a fast-growth startup with a national or global potential as one of only a slice of “small businesses” that the Fremont Group addresses below, are they addressing you in relation to your business in startup or early-stage development?
Partners in your Success
*95% of small businesses do not have a functional budget.
A BUDGET IS A FINANCIAL PLAN DESIGNED TO PRODUCE A PREDETERMINED, DESIRABLE RESULT,
Your budget is your most important financial tool. Without a properly developed budget, a small business owner cannot have financial control of their company; cannot write a meaningful job description; cannot hold employees accountable, cannot rationally price their goods or services, and cannot calculate their break even. You won’t reach your destination if you don’t know where you are going!
Extensive time with small business owners verifies that they are good and accomplish everything that they try to do. They try to sell; they sell. They try to collect money; they collect money. They can do whatever they focus on. Here is our challenge: focus on making money! Without a financial plan designed to produce a predetermined desirable profit, you aren’t focusing on making money!
The Fremont Group has videos and articles on budgeting that provide considerable detail, however, the principle is simple: budget percentages in the same format as your Profit and Loss Statement.
Revenue (or Sales) will always be 100%.
Your Cost of Goods Sold is the desired percentage of your sales that are used to directly produce your goods or services. This always includes materials, direct wages, and subcontractors. Depending upon the industry there may be others. The rule is it includes all costs that would not be incurred if you didn’t produce your product or service. Examination of your historical Profit and Loss Statements, the owner can establish the desired percentage of COGS.
Your Gross Profit Percentage is a subtraction problem: 100% minus COGS percentage.
At the bottom of your Profit and Loss Statement is your Net Profit. Enter the desired amount of Net Profit. Subtracting that percentage from the Gross Profit Percentage establishes the PERCENTAGE OF SALES YOU CAN AFFORD FOR OVERHEAD. Then you must analyze your existing overhead expenses to determine if this amount is reasonable and adjust from there to establish your budget.
Once you have your budget, your financial meetings do a budget versus actual analysis so adjustments can be made either in your operations or in your budget. You are never “finished.” Your budget is a flexible, living document.
The Fremont Group can work with you to gain financial control of your company.
Dirk Dieters, Executive Director
The Fremont Group
(303) 338 9300
(520) 638 7863
admin@tfginfo.org
In truth, the Fremont Group probably has a book of established lifestyle business clients. It would also be hard to argue with their advice to these clients. This seems to be to be not only sound advice but advice that is rather fundamental. Yet, I know from having been a consultant for over 20 years with a book of clients like theirs, that they are right in saying most don’t budget or manage to budget well at all. I’ll throw you another statistic. Fewer than 10% of lifestyle businesses make any entity profit, and a chunk of those profits are less than what the owner could earn selling the same skill set as an employee in a large company.
But, you are not a lifestyle biz, you are a “fast-growth” innovation startup. You are pre- or early revenue. You are not “established” yet. Heck, your sub-industry might not even be established yet as it exists in such an innovative, developing capacity.
So, does the advice apply to you? Yes, it does, and here is how….
Change the word “budget” to “capital-plan(-to-exit)” and “small business owner” to “startup”, then re-read Fremont Group’s advice.
Still every bit as true, isn’t it? If you don’t agree, you shouldn’t run a startup. Sorry, but this is simply a core truth.
And equally true as your lifestyle management counterparts, most innovation startup managers don’t have a thorough, robust, bottom-up-built capital-plan-to-exit to which they manage. This is why you (even more of you than lifestyle starts) fail.
Some will argue that there are all kinds of reasons for failure, and that’s fair. But I recall a survey done some years ago by a global research firm. Of 100 reasons, the #2 reason listed by founders that they failed was this: they ran out of cash!
<Duh moment.>
A business as an entity exists when it has cash in the bank, and ceases when it doesn’t (for 30-ish days typically). Looking over the list of their other 99 reasons for failure, it’s simple logic to argue that all 99 other reasons caused the out-of-cash condition. 99 reasons for running out of cash lead to really the one reason for going out of business – it’s a universal dependency chain. Cash is king. Cash measures all other results!
Therefore, if you are going to manage to keep a business from going out of business – you must manage the cash first, right? All other decisions are made in light of present and future impact on cash. Try to argue your way around this, if that’s how you learn, or accept the root premise and read the conclusion below.
A “capital plan to exit” is the plan for all cash coming in (investors, debt, from sales, etc.) and all cash to go out on the way to a liquidity event for you and your investors. If the balance ever dips below zero, you’re out. If it ever dips anywhere within sight of near zero, you’re margin of error probably means you’re out.
OK, so what? Well, the very activity of making the plan forces rational thought into how every assumed number gets conceived and added up. It puts you on the hook for your assumptions, and defending those assumptions to yourself, your colleagues, and your investors. It grounds you to manage in keeping to the plan to reach milestones or else explain deviations from the plan while you continuously adjust it.
Thus, when you don’t do this, as probably a top-3 primary ongoing activity of running a startup, you’re just shooting at ducks on a moonless night. You might be able to make out a few shadowy lines for what is in front of you, but you’re mostly just hunting blindly for success and your risk of failure is “magnifold” (my silly mash-up of “magnified” and “hundred-fold”.
The last generation of seed investors has been too gracious to startups for various wide-ranging reasons better left for a sociologist to blog about (OK, Boomers?). The incoming generation of more data-reared seed investors, who are fewer to-boot, aren’t going to invest so subjectively or emotionally. We will be less emotive in our investment decision-making and expect anyone asking us for money to show more rationality in their business execution plans than perhaps you are prepared for, or even the entrepreneurial educational ecosystem prepared you for.
But change is coming, in expectations, for everyone. Some who see it ahead will adjust and thrive (founders and investors alike), but many more will be blindsided, and complaining about it after the fact will only be confirmation that your project isn’t a risk worth taking.
Just shooting you straight.