Every second month Emma answers a finance question (via Vlog or Blog) asked by a member of Microsoft Bizspark or the startup community. This month, she answers the question of where to start when it comes to preparing a budget.

#Nudgemoments StartUp Question: I’m applying for R&D grants and investor funding and I’ve been asked to put together a budget. Where do I start?

Emma’s Response

 At Nudge, we see a budget as “your startup story… in numbers”. A budget tells the story of your startup’s journey and uses numbers to do so. How has your startup performed to date? Are you at the stage where you’re making sales? What have your expenses been? What’s your growth been like? What does the future look like for your startup?

Whilst constructing a budget is generally a requirement for funding, when done properly it also helps you to make better business decisions. Knowing your numbers can help you visualise when you’ll be able to expand into new markets, understand your resourcing requirements and also stay accountable. Tracking your performance to budget also helps you understand where you are compared to your expectations. Also by comparing your actual performance to your budgeted performance, the variances can help you identify both problems and opportunities.

Before you even start preparing your budget, there are a few parts of your business story which you need to understand:

  1. Know your strategy. What do you want to achieve? How will you get there? When do you want to achieve it by?
  2. Think about all the different touch points which contribute to a “sale”. My key suggestion is to map this out. Consider customer visits to your website, customer conversions, sales per customer. It’s super important for you to grasp an understanding of the different drivers which will lead to a sale and money coming into your business
  3. Then have a think about all the costs which lead to a sale. Each product you sell has a cost. What are your product costs? Also don’t forget to include operational costs such as rent and travel. Although you might be working on a shoestring at the moment, this won’t always be the case. You need to ensure that these costs are reasonable and sustainable. Also remember to factor in costs for growth, such as more dollars spent on marketing and advertising 

After considering these points, it’s time to start putting together your budget. These steps will help you get started:

  1. The first thing you need to do is document what’s happened in your business to date from a numbers sense. If you haven’t invested in accounting software, pull together an excel spreadsheet listing your key
    income and expense items. Track these numbers on a monthly basis and also include running balances for the past year. Also for a better understanding of your numbers, group sales and expenses according to key drivers.  i.e. if your sales last month was $10,000 – how many sales contributed to this? What was the average sale price? One piece of advice here - don’t get too caught up in such small detail that the numbers become useless.  Sometimes startups make the mistake of going a bit overboard when tracking expenses - having an expense listing only containing $5 may not be meaningful. Group your expenses where possible.
  2. Then think about what you expect your numbers to look like over the next month and over the next year. Will your sales increase by x%? What impact will this have on expenses? What do you want your profit to
    look like? Remember a budget is simply you telling your business story. Set a budget which is realistic but also one which is ambitious. It may be a requirement for funding, but knowing your numbers will also help your start-up on its journey to success.

Emma Petroulas is Client Happiness Director at Nudge Accounting. She also lectures in Small Business Accounting at the University of Technology, Sydney.

To have Emma answer your finance question next month, post a comment here or tweet using #Nudgemoments