Startup - Forecasts and Budgets 2021 Why they’re important and how to do them like a pro
Are we in the fourth quarter already? Time flies! We’re almost at the end of 2020. However your business is faring this year, it’s time to reboot and start forecasting and budgeting for 2021.
A forecast and budget are useful tools that can help you decide how you’ll contribute to revenue goals and which future projects to take on, as well as help you keep expenses on track. If you want your startup to survive at least the first few years, a forecast and budget is a critical part of that foundation.
Whether you’ve done a forecast and budget for your startup before or this is your first time, you’re at the right place! I’ll show you tips and tricks to get it done like a pro.
What is a forecast and budget?
A forecast and budget is also called a pro-forma statement. It’s a plan for the next year quantified into dollars. It’s a form of cash management. The forecast estimates how much money you will make (revenue), while the budget sets a limit for how much you can spend (expenses).
Why is a forecast and budget so crucial to your startup?
Forecast and budget serves as a roadmap for your startup. It helps you plan ahead and make well-informed decisions on important questions, such as:
1) What is the total revenue you plan to make next year?
2) How much needs to be spent to increase revenue?
3) How many people do you plan to hire to reach your revenue goal? What is the cost associated with that?
4) What are the projects/developments each department (HR, finance, IT, marketing, sales) plans to execute and how much does that cost?
5) What are the burn rate and run way? (There are definitions of these terms at the end of this article.)
6) How will you break even financially or, better yet, be profitable?
7) Are you fundraising next year? If so, how much are you raising to get you to the next level?
When do you forecast and budget?
A good time to start is about two months before the year ends. Larger companies start much earlier so there’s more time for adjustments to be made and assumptions to be fully discussed and reflected in the numbers.
How long does it take to do a forecast and budget the right way?
Depending on the size of your startup, it usually takes about one to two months to get the first version of the forecast and budget, collect input from each department, revise, present to board members, and then finalize for implementation.
Be optimistic but realistic
Your startup’s financial projections aren’t set in stone, but you need to be realistic about your plans and be clear about your goals. It’s a fine balance between optimism and realism. Consult with people who have relevant industry experience, such as your CFO/CPA, to get feedback on your plans.
Make sure to prioritize the most important goals. In the first draft of the plan, have one page where you list all the goals you have for the new year and rank their importance, then work with your team members to estimate how much it will cost to achieve those goals.
Plan for various scenarios
Whether you’re the kind of person who sees the glass as half full or half empty, it’s a good idea to plan for different possible financial outcomes for your startup. Knowing the outcomes of different scenarios will give you peace of mind and light a fire within you. You now have the comfort of knowing more clearly how to get to the best outcome, and what you can do if you can't get there.
It’s a common practice when building the forecast and budget to plan for different scenarios and incorporate them into your analysis. The easiest way to remember how to do this is to plan for the worst outcome, the most likely outcome, and the best outcome. This is called scenario analysis.
Good forecasting and budgeting for a better business
A forecast and budget is the first line of defense for a business that’s in its early stages. They can help you form an action plan that lets you adapt to changes and anticipate cash shortfalls. If you take the time to make a well-defined forecast and budget, you’ll be more prepared for what the future holds. The forecast and budget process is an exercise you and your team do together. Brainstorm and explore the unlimited possibilities, then turn them into reality!
A CPA’s 2 Cents
The forecast and budget is crucial in guiding the success of your business. It serves as a long-term vision for your startup.
To summarize the process of making a forecast and budget, remember that you want to align on company resources, create a financial plan that excites everyone, plan for different scenarios, and be realistic.
In part two, I will show you techniques for creating a forecast and budget from scratch. Stay tuned!
Definitions:
Burn rate – How much you spend monthly
A burn rate is how much your startup spends per month. Your burn rate lets you know how much you need to have in the bank to keep your company running. Your burn rate reflects how long you can operate before you run out of cash and how much needs to be invested or reached with sales.
Burn rate = cash opening balance - cash ending balance of the same month
Runway – How long you can last without additional funding
Runway is the number of months your startup can survive without any additional funding.
Runway = Total cash in the bank ÷ average burn rate
