In order to bring revenue, every startup needs to have a solid financial backup provided by investors. Before planning your budget and handing it down to people that might be interested in financing your idea, it’s worth taking a moment to rethink your strategy to ensure your prospective funds are used as efficiently as possible. Here’s a selection of some of the most common mistakes startups make when planning their budget.
No planned budget at all
This sounds surprising, but it still happens – people who have great ideas are not always prepared to discuss them from a financial point of view. When talking with investors, you must know how much money you will need and how you will allocate it, otherwise your plan is no plan at all.
Budget without a goal
When sketching a budget, it’s easy to lose sight of future goals and simply write a plan of expected expenses and revenues for a given period of time. This simply won’t work. Budget needs to be based on what you set as your main goals for the next 6 months or a year – otherwise, how will you know that things are going in the right direction?
This is a common mistake – when requesting a certain amount of investment, startup creators usually just sum up their expected costs for one, two or three years. Investment needs to cover the whole period of time before a startup becomes profitable.
Underestimation of expenses
Some costs tend to be underestimated, others – completely forgotten. This might and will have dire consequences on the future of a startup. When planning your budget, you need to take the totality of a situation into account – if you’d like to employ a marketing specialist, for instance, count in the costs of all the equipment he’ll need to do his job: a desk, a laptop, some licenses and proper software.
Overestimation of profits
Everyone needs a general revenue analysis, even though it rarely matches the reality of a business. The most common mistakes in this area include: forgetting about the seasonality of business, overlooking the reality of customer resignation and assuming overly expansive monthly revenue growth. It’s better to consider whether your idea will bring profits while still planning the budget – a mistake like that in reality will cost you much more.
The salary of startup founders
This is a tough one – creators might think that high salary comes naturally with their paramount role in the creation of a startup, whereas in reality it’s them who should be the first ones to renounce from a high salary. If you plan to make your salary as high as possible, think for a moment how it looks like from the perspective of your investor – you get the money immediately, while he has to wait years for the business to bring profits.
Too small a financial cushion
When creating new investments, companies that are already in the market usually leave a margin of 4.5% for unforeseen costs. Now think of your startup – it’s even more unpredictable. In planning your budget, you simply must allocate an amount of money for some nasty surprises. If you do that, you’ll avoid cutting down on your salary or letting go of your employees in the future.
Your budget plan is not a math test, but some mistakes might have considerable repercussions – like doubling your profits, without which your budget won’t work. Before presenting it to anyone, recalculate your budget to find potential errors before it’s too late.