A common question we often get from startups is, “when should my startup do budget vs actuals?” To answer this question, I must also address the two embedded questions: the first one is, “what point in my startup’s life cycle should I start doing budget to actuals?”and the second one is, “what time of the month should I start doing budget versus actuals?” Both are pretty important.
Before we get into it, let me just define budget versus actuals:
I’m a huge fan of budget versus actuals. It’s basically taking your financial model or projections and comparing them every month to your actual results. For example, compare your accounting numbers versus your projection numbers. The reason why this is so powerful is it brings a lot of scrutiny and discipline to the company. Especially as a founder, you need to know what your expectations are and how you’re doing against your expectations.
That’s what venture capitalists look at, and you can expect them to analyze this regularly after they’ve made an investment (or in the months leading up to investing in your company). So, you might as well start focusing on this and get into good habits early on.
If you spend a couple of hours a month doing budget to actuals, it’ll pay for itself ten-fold.
Benefits of Budget VS Actuals:
- Brings real accountability and scrutiny to your organization
- Measures how you’re really doing vs. expectations
- Gives visibility to where you are leaking money by coming in over budget
- Displays where spend is not that effective
- Ensures you’re hiring correctly
When should you start doing budget versus actuals as a company?
Ideally, you would start doing budget actuals on day one. Even the act of doing those projections and building a financial model can be really helpful and teach you a lot about your business.
Now you might be saying “what if I don’t have a financial model?”. Well, guess what? We’ve got you covered! We have a free one on our website. You can download it. It’s awesome, and it’ll get you where you need to go in the super early days.
Eventually, you’d probably want to work with our FP&A team to build something custom that’s right for your business. But again, there’s no excuse. There’s a free financial model template on our website that you can use.
So, day one is a great time to get in the right habit of that. If you’re not going to do budget vs actuals on day one, then I would recommend starting it when you begin raising seed round. That is the time where you first took institutional capital and investors want to know that you’re doing budget to actuals and you’re a fiduciary. They want to feel confident that you will look after their money in a very professional way.
Now, sometimes founders say something like, “my team is too small and I don’t have time at the seed stage.” So at the very last point, I would recommend series A. Again, I prefer you to do it earlier, but if you’re going to wait, series A is the moment where you have to start doing this. The reason why is, the dollar amounts start getting a lot bigger in series A. For instance, you’re raising five to ten, maybe even more money if you’re really lucky. You can start spending that money, but if you overspend for a couple of months, that’s a very material amount of money. So catching that leakage and seeing things that aren’t working, has a huge value added to you.
The reason that founders get pushed out of a company is typically that they spent money irresponsibly. The venture capitalists do not want to be surprised and learn that you were running out of money six months before you said you would, because you didn’t manage to spend correctly.
So doing budget to actuals is the best act of self-preservation.
It is one of those things that will teach you good habits and make sure you don’t get pushed out of your own company. The VCs don’t want to do that. They just want to see you spend money responsibly.
Now, what time of the month?
Typically you want to have your accounting team have completed their bookkeeping work before you analyze how you did against the plan. They typically do a first close and you get everything done and then you will go over it.
We will typically deliver financials on the four Thursdays throughout the month, depending on what date our client wants. Then we will always schedule a call with our founders to go over the financial results, answer questions, and ask questions.
If you need help, or if you’re not working with someone who knows how to do this, just give us a call. We work with 300 clients and that is not even including the clients that have been purchased or have outgrown us.
Having the conversation is important so we can do a final close of the books for the month. It’s usually not a lot of work. It is just a little bit of dotting the I’s and crossing the T’s. But at that point, you will be very confident in your financials.
Typically, in our budget versus actual process, you will spend time with our FP&A team and your account manager.
Having the conversation around the budget versus actuals can be really impactful for the founders because you can ask all the questions you might be embarrassed to ask your venture capitalists.
We are friendly, we’re here, and we are on your team. And so making that call around the budget versus actuals is very, very powerful.
As a founder, learning how to catch when you’re spending money when you shouldn’t, when you’re leaking money, or are just over budget can really improve the performance of your company.
It can extend your runway, and maybe most importantly, it’s just a great form of self-preservation. Your investors will have a lot of confidence when you tell them you’re doing budget to actuals.
So I hope this helps. Again, I cannot emphasize enough, that budget versus actuals is one of the best tools in your tool belt.