Budgeting is a hugely important task for start-ups and small businesses. With rigorous and thorough budget planning, businesses can set themselves up for success and build a clear financial roadmap for the year ahead.
Budgeting also impacts many areas of a start-up company, from managing expenses to improving performance and maintaining profitability. If a business commits to effective budgeting, it can lay down the foundations for rapid growth and future investment.
But why is budgeting so important for start-ups? And who should be leading the charge when it comes to budget creation and management? Let’s take a closer look at the role budgeting plays in small businesses, and outline the different options companies have when it comes to setting a budget.
Why is budgeting so important for start-ups?
The concept of budgeting is fairly simple. Start-ups need to estimate their costs, expenses, funding, and revenue to understand how they’re performing financially and where there may be areas for growth. This sounds like a straightforward task, but it’s also critically important for businesses that want to expand and improve profitability. Budgeting also doesn’t exist in isolation - it influences many different areas and departments within a business.
Cash flow management
Smart budgeting is vital for cash flow management because it enables businesses to clearly understand their forecasted income and outgoings. The more start-ups understand their cash flow, the more they can make informed decisions about budget allocation.
Hiring and recruitment plans
For start-ups looking to expand their teams and make new hires, budgeting is crucial. With a clear budget in place, businesses can properly prepare for the costs of new hires and identify any opportunities (or gaps) within existing teams.
Analysing internal performance
Start-ups can also leverage SaaS performance metrics to shape their budget and identify departments (e.g. sales, marketing, product) that need the most investment. This allows small businesses to utilise their funds in the most efficient and profitable way.
Prioritising projects and workstreams
Once businesses undertake the budgeting exercise, they’ll also have a much better idea of the projects and workstreams that should be prioritised in the year ahead. Investing in the right projects is absolutely critical for start-ups, particularly during early growth stages, and budgeting is a sure fire way to move funds in the right direction.
Planning for the year ahead
A meticulous budgeting process also creates a valuable financial roadmap for start-ups. This enables small businesses to understand when they might be receiving substantial investments, and when their expenditure may be increasing. All of these insights can help start-ups to make informed decisions and prepare for different eventualities.
What are the different types of budgets?
There are many different options when it comes to budgeting strategies, and the right choice for a start-up depends on several variables. However, there are two primary budgeting methods that most small businesses use - bottom-up budgeting, and top-down budgeting. Each option has its own strengths and weaknesses and can be better suited to different types of start-ups. Let’s explore these two budgeting methodologies in more detail.
Top-Down Budgeting
As the name suggests, top-down budgeting starts with senior management. Business leaders create budgets for each department, and the departments need to build their annual plans around these fixed budgets. Top-down budgeting can be effective because senior leadership teams have a better understanding of long-term strategy and company resources. With a holistic approach to budgeting, senior managers can analyse the entire business and shift budgets accordingly, rather than focusing too much on a single department.
However, top-down budgeting isn’t without its flaws. For example, top-down budgets can often leave certain teams under-resourced, underfunded, and de-prioritised. This can be particularly true for start-ups with more complex structures or varied teams, as it can be difficult for senior leaders to have sufficient knowledge of every department’s requirements. The top-down method also isn’t particularly collaborative. This may cause some internal issues between departments, particularly if senior leaders aren’t tuned in to the specific needs of different teams.
Bottom-Up Budgeting
Bottom-up budgeting tends to be the most popular option for many start-ups. With a bottom-up approach, departments request their own budgets based on their specific needs. Team leaders will submit budget plans to senior leadership, and the budgets will then be distributed accordingly. This approach is far more collaborative and may be perceived as fairer by team leaders. Plus, since departments need to submit detailed budget plans justifying their requests, it can be easier for senior leaders to understand where funds are required. Team leaders will also have a much better understanding of the inner workings of their departments.
But that isn’t to say that bottom-up budgeting is perfect. Departments can sometimes request more budget than necessary, and senior management relies heavily on team leaders to pull together accurate and realistic plans. Both of these budgeting methodologies have their advantages and drawbacks. Unsurprisingly, many start-ups find that a hybrid approach to budgeting often delivers the best results and maximises the strengths of both options.
Who should be in charge of budgeting?
When it comes to the budgeting process, financial planning and analysis (FP&A) teams should be taking the lead role. These teams have access to all of the financial data and business reports that are required to create a solid budgeting plan.
Modern FP&A teams are also integrated more closely across different departments, rather than working in siloed back-office roles. This means that FP&A team members have a much better understanding of how start-ups are operating, enabling them to budget more effectively.
If you’re interested in learning more about the crucial role that FP&A teams play in start-ups, check out our comprehensive guide on the subject. Budgeting is always a fundamental exercise for all businesses, but it’s particularly important for start-ups that are looking to optimise their operations and maximise profitability.
If you’re looking to build out your finance and operations teams to accelerate growth, don’t hesitate to get in touch with Chris ([email protected]) for specialist support.
