Financial budget, forecast and projections for your startup

By Chris Russell

The terms financial budget, financial forecast and even financial projections are sometimes used interchangeably but have very different functions. They can seem overwhelming to startup founders, but their use is critical, especially in the context of cash management and fundraising. My goal with this post is to help you better understand each and offer suggestions on how to best put them to work in your business.

To start, what is a financial budget, financial forecast and financial projections?

A financial budget shows in financial terms where you aim to take the business. Generally speaking, a good budget reflects middle-of-the-line expectations and outcomes for the business. Typical you set your budget on an annual basis and will have it approved by your board of directors. It’s a helpful tool for your exec team and board to manage and monitor the business. For the early-stage company, one of the key insights it offers is how much capital is going to be required to sustain operations.

A financial forecast reflects current conditions and assumptions of where the business is heading. Unlike your budget, you will be updating your forecast throughout the year. Assuming you have the resources, you may be updating as frequently as every month. Why this is important, say for example the sales assumptions used in setting your budget proved to be incorrect (not uncommon). Having a forecast which reflects these adjustments will allow you to properly manage the business according to the new realities which are critical for successful cash management.

Financial projections in the context of this blog post are used in fundraising to show investors the potential future financial outcome of the business. A 5-year horizon is typical. Creation involves use of your budget and forecast data while adding additional assumptions.

Suggestions for creation and use of your budget:

  • A spreadsheet is still best – good templates are available to speed things up. Several software solutions are also available; I have yet to find one I really like. Any potential investors will appreciate having the data in Excel format so they can work with the data.
  • I recommend using 24 months as your budget period coupled with re-visiting annually. Extra focus should be given to the first 12 months. The reason I suggest going out 24 months is primarily for adequate runway planning.
  • Include monthly detail for all items.
  • At this stage of your business, you can usually get away with not building pro-forma financial statements, which will save you time. Meaning, what will the financial statements of the business look like as a result of the budget?
  • A monthly cash flow component is critical. Your budget should show cash totals for the start and end of each month.
  • Payroll costs should be broken out by department.
  • Hiring plan costs should be specific
  • SaaS businesses should include non-financial details such as customer totals, CAC, expected churn, ARPU and MRR. Essentially the supporting business model detail that gets you to a revenue number.
  • Take the time to monitor your budget vs. actual performance which will help when it comes to accurate forecasting and future budgeting.

Suggestions for creation and use of your forecast:

  • Frankly, this can be a time sink to do right and the resources probably won’t exist within your startup. The goal is to find an efficient working solution for your business. I recommend creating a mirrored version of your budget and then update with current learnings and assumptions.

Suggestions for creation of your projections:

  • Year 1-2 should be a duplicate of your current forecast. No need to duplicate work.
  • It’s a fool’s errand to produce granular detail for anything beyond year two unless of course you have prophetic powers. You’re going to be best served by extrapolating using growth percentages. An early-stage investor should not expect anything more. Investors will appreciate seeing you have a detailed plan for near-term and a grasp of how things scale long-term.
  • Avoid hard-cording any assumptions. Investors like to play with the data and work with your assumptions. Example, if customer acquisition costs increase 15%, how does this change runway?

While there is a meaningful investment of time required to start building out your company’s financial budget and maintaining a forecast; you’ll find it pays dividends. The feeling of having a handle on your cash situation does wonders in reducing stress and will make for a successful fundraising experience.