How to build a healthy budget for your startup

A startup’s budget can feel like a catch-22. If you spend too much money before revenue comes in, you’ll quickly find yourself in a hole you might not be able to climb out of. If you spend too little, your growth will be slow — all while you’re still incurring expenses.

Even if you’ve received a VC investment to help bring your product to market, you still have to create a realistic budget. With effective budgeting, you can manage your cash flow and invest in the right areas of your business (such as additional employees or new equipment). We’ve rounded up some things to consider as you establish your budget and modify it as you grow.

What to consider when setting up your budget

Your startup’s budget may seem full of unknowns. It often is: you’re spending money in advance of revenue to get your business off the ground.

Building a sustainable business means planning how much you’ll spend before you can realistically expect more revenue. Here's what to keep in mind as you map out your budget:

Your expenses

In the early days, you’ll have more control over your expenses than your income. But what should you spend on when your revenue is unpredictable or minimal?

It helps to break down your expenses into two categories: essential and nice-to-have. Essential expenses are required to keep the lights on: costs related to your employees, your website, and any cloud storage or hosting, or any costs associated with selling or delivering your product. Nice-to-haves might be things like tools that make your employees’ jobs easier, a generous marketing budget for a big brand awareness campaign, or fees associated with attending conferences or sponsoring industry events.

You can further categorize your expenses by fixed costs versus variable costs versus one-time expenses. Your essential, fixed costs should be the most predictable and first in your budget. Then you’ll consider costs that are essential, but might vary every month. You may have one-time costs (like computer equipment) that are necessary upfront but won’t happen every month.

The last part of your budget will be dedicated to your “nice-to-haves” — and that’s where you’ll need to consider how much you want to spend, knowing that the expenses will burn cash. You’ll also want to think about a cushion in your budget for any unexpected expenses, or set up a savings account as an emergency fund.

Department buy-in

Even if your startup is small and you have teams of one, you should get buy-in for your budget. For example, your head of marketing should understand the amount of money dedicated to advertising or content. You should collectively agree on the salaries and number of employees for different roles like engineers or customer services.

Your team should understand why budget decisions are made: why you’re opting to spend money on one cost versus another. Your budget may go through several iterations before you come to a consensus.

Your leadership team and/or department heads can also collectively agree to increase the budget if certain targets are met. This might include adding a new employee when revenue hits a certain point or using additional cash for a larger investment. By deciding on revenue benchmarks, everyone knows when more money will be available in the budget.

Scenario planning

As you consider different revenue targets (such as reaching a certain MRR), you’ll also want to plan for various scenarios. This is especially true if your revenue is less predictable — like e-commerce — and you have seasonal periods or less control over your sales volume.

With scenario planning, you’ll create several “what if” scenarios. Your essential versus nice-to-have expenses will factor into these different scenarios. You might be able to ease back on nice-to-have spending if you experience a slow quarter but have contractual obligations for other expenses. Technology can help with scenario planning, like an app that allows you to adjust variables and see the impact on your bottom line.

If you have multiple scenarios planned out, you can adapt more quickly to changes in your revenue. You won’t need to spend time plotting out a new budget; instead, you can shift to Plan B.

Tie your budget back to your goals

A typical year-long budget should still reflect your long-term goals. The spending for a product-led company will look very different than that of a sales-led organization, and so on. Two startups could be placed side-by-side, with similar funding, and allocate their spending much differently.

You have to start with your vision and how you plan to get there. The numbers should align around that vision. A lot of it will depend on your tolerance for risk and how aggressive you want to be with growth.

If your goal is to stretch out your cash as long as possible, that will dictate your budget. If you want to make a splash in the marketplace, you may spend a lot in the early months. Your budget, your goals, and your cash on hand: they’re all intertwined.

Revisit your budget as needed

Creating your budget is only half of the process. The other half is comparing your actual income and expenses to your budget. Do a monthly comparison between your budget and your financials.

Even though you’re doing the comparison, you don’t want to adjust your budget unless something changes drastically. Because of the volatility of startups, one bad month may not be a reason to shift your budget. You’ll only want to change your budget if you notice a trend or consistently miss your targets.

The healthiest budget you can create is one that has flexibility. As you grow and have more predictable revenue, you can make more long-term budget decisions. But the beauty of being a startup is that you can react to change quickly — and that includes managing your budget.