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Why Budgets Matter

Even startups need to forecast and plan--especially now.
June 15, 2009
URL: http://www.entrepreneur.com/article/202308

Most entrepreneurs detest budgeting. Working on something as old-fashioned as an annual budget confines the imagination and limits flexibility. Still, budgets are more important than ever in today's market environment.

I've heard all the excuses for avoiding budgeting. "Startup cash flow is too unpredictable." "One big customer order could change the course of the business, so what's the point in setting a budget?" "I can't predict the capital market, so how can I forecast how much cash I'll raise and be able to spend this year?"

In my experience, these excuses mask the fact that right-brain creative entrepreneurs just don't like left-brain financial planning. So, if you're running your startup solo, you should force yourself to develop a budget to hold yourself accountable. Here are three reasons why:

  1. It will help you to become a better manager. When done properly, budgets can be extraordinarily useful in testing and refining your ability to forecast and manage. While boards like to use budgets to hold managers accountable, the startup CEO can use budgeting to test whether the drivers of his business hold true. One straightforward way to do this is to set an annual budget with a set of key assumptions (e.g., number of new clients; product price), then reforecast the year every quarter by updating those assumptions with the latest results.
     
  2. It will help you raise money. When I raised money from angel investors or institutional investors, I learned firsthand the importance of budgeting. Investment terms often specify that management must provide the investors or the board with an annual budget. Developing a company culture that tracks results to budget will help you meet and exceed the expectations of your investors.
     
  3. It will help you avoid running out of money. The No. 1 risk to any startup is running out of money. If you're like most entrepreneurs, you'll fluctuate between a conservative reality and an aggressive dream state, which keeps you motivated and helps you inspire others. When you build your budget, start with expenses, not revenue; they're much easier to forecast. This will keep you grounded and reduce your risk of running out of money.