Dear Founder,
In the very early days, you can probably manage expenses pretty easily.
However, I still advocate having a simple plan for expenses—know what you are allocating toward head count, marketing, software, computers, lease, furniture, etc. Even in the early days, you can track how you are doing against what you thought you were going to spend, and most importantly, if there is a delta, you can find out why.
Once you are growing—and certainly when you are between a Series A and Series B round of funding—you will likely need a more formal budget process. This is a blend of art and science.
The art of implementing a budget process is to ensure:
1. You are fully (or near fully) funding the most important things.
2. It is clear where the money is being spent.
3. There are mechanisms in place to spend wisely.
It’s common for big companies to spend many months on the budget process. They often set top-down targets and ask for bottom-up requests. The problem is, these two camps generally don’t reconcile, creating tension and leading to budget wars. Until things get settled, people often feel like winners and losers.
When I was at IBM, the head of finance in my location tried to gamify this tension. He had several personas that he had developed for characters in the budget process. One was “The Gardener,” whom he told us to be careful of—every time you cut a branch, new shoots appear. His solution? “Cut it off at the root.” Another character was, “The Dying Man,” someone who was clearly convinced that the organization could not keep its head above water. In this case his solution was, “Throw him a lifeline.”
But startups don’t have time for this kind of overhead or distraction. My recommendations:
• While setting an annual plan is good, understand that your business is probably too early in its life cycle to have this cast in concrete. Revenue projections are always wrong in some fashion. Therefore, plan to true up the budget and the actual spend every quarter. This way you can see and tend to what your growing business needs. If sales aren’t ramping, maybe hiring slows. Conversely, if growth is exploding, maybe you free up more spend.
• Instill financial discipline early. Spend money like it is your own. (And if you’re not great with money, spend it like your very frugal family member.)
• Get alignment between the executive team and the board on the overarching goals. This means: revenue, gross margin, profit/loss, head count, etc.
• Work on allocation. I’ve always found it wise to reserve some allocation at the CEO level. This enables you to have resources for unforeseen issues as opposed to clawing things back from somebody. (It’s better to never give something than to give and then take away.) At WIN, I have 10% of the budget allocated as “discretionary,” so if we make a mistake and don’t have enough funding for something, I can decide to still do it and relieve some of the pressure.
• Create a challenge. If you are close to what you want to spend (over by only 5–10%), put that in as a challenge that the whole team is committed to solve. Most companies wind up hiring more slowly than planned and also underestimate the attrition, which will likely cover your challenge issues. Remember this truth: People spend lots of time arguing for specific, exact head-count numbers even though they are generally not going to hit them.
• There is no entitlement. Just because you received a big allocation last year doesn’t mean that is the starting point this year. At eBay, we asked everyone to shave 5% efficiency off their base each year, which we called “save to invest.”
With budgeting, perhaps the most important rule is this: Always look to get better and spend smarter. Those extra dollars saved can be allocated to do more strategic things.
All the best,
Maynard