For many early stage startup, the process of budgeting is limited to figuring out where to get the cash to meet next week’s payroll and expenses. There are so many financial fires to put out in a given week that it’s hard to find the time to do any short- or long-range financial planning. But failing to plan financially might mean you're unknowingly planning to fail.
Business budgeting is one of the most powerful financial tools available to any early stage founder. Put simply, maintaining a good short- and long-range financial plan enables you to control your cash flow instead of having it control you.
The most effective financial budget includes both a short-range, month-to-month plan for at least a calendar year and a long-range, quarter-to-quarter plan of at least three years that you use for financial statement reporting. It should be prepared during the two months preceding the fiscal year-end to allow ample time for sufficient information-gathering. The long-term budget should be updated when the short-range plan is prepared.
Many financial budgets provide a plan only for the income statement; however, it's important to budget both the income statement and balance sheet. This enables you to consider potential cash-flow needs for your entire operation, not just as they pertain to income and expenses. For instance, if you had already been in business for a few years and were adding a new product line, you'd need to consider the impact of inventory purchases on cash flow.
Budgeting only the income statement also doesn’t allow a full analysis of the effect of potential capital expenditures on your financial picture. For instance, if you're planning to purchase real estate for your operation, you need to budget the effect the debt service will have on cash flow. In the future, a budget can also help you determine the potential effects of expanding your facilities and the resulting higher rent payments or debt service.
- Mentor: Gatot Soepriyanto