What you’ll learn:
- Guidelines for building a focused budget with early-stage capital
- The most important financial metrics for high-growth budgets
- How to refine your budget over time and monitor your cash flow
Most startups raise capital from a combination of sources including grants, loans, and investors. Startups then use that money to grow their business toward important milestones like developing products, hiring employees, and launching in-market.
If you’re just striking out to raise money, you might not have a solid budget or financial forecast mapped out. So how do you decide where to put your dollars first? Use this simple strategy to get started.
What is a startup budget?
In the most basic sense, a budget is a planning document based on your capital, your expected costs, and your priorities as a company. Developing a budget has many advantages:
- Accurately manage cash flow
- Avoid costly spending mistakes
- Make informed financial decisions
- Work toward business goals
How is a high-growth budget different from a traditional business budget?
Traditional small businesses aren’t focused on scaling. They reach their operational capacity (a certain number of customers and employees, a certain amount of revenue and costs) and stay there. High-growth startups, on the other hand, are hyper-focused on scaling—and in doing so, increasing their ROI.
The main goal in a high-growth startup environment is to improve performance, efficiency, and production to meet ever higher levels of demand. These companies have unique spending priorities, costs, and budgeting needs that have to be reflected in their financial planning.
How to build a budget for high-growth startups
When you have a limited amount of cash and limitless ambition, use these basic guidelines to make smart decisions and get your business off the ground.
1. Figure out what problems you need to solve first
Every round of funding should have a clear purpose—especially early investments.
Many high-growth startup founders choose to put their first rounds of capital toward creating a prototype of their product, beginning to build a team, or proving product-market fit. Your exact spending priorities will depend on your industry, where you are in the product life cycle, and the amount of capital you have in the bank.
Here are some simple guidelines for thinking about your budgeting strategy:
- Do the most with the least. Understand what you need to prove each quarter, then reverse engineer a way to achieve that goal while spending the least amount of money. Your number one job as a founder? Don’t run out of money! Hedge your bets by underestimating revenue and overestimating costs.
- Measure early and often. Decide how your business will measure success. Is it waitlist sign-ups, app downloads, account conversions, orders? Determine the metric that matters and allocate funds toward growing that number. Keep track of performance so you can adjust spending as needed.
- More money isn’t always good. If you’re building something in a new space like crypto, you may not have a clear idea of what product-market fit looks like. Taking in less money early on could be an advantage. Raising lots of capital with no roadmap for how to spend can be a burden for founders. Plus, more money equates to higher dilution which founders typically want to avoid early on.
The focus of each round changes as you raise more money, but the strategy should stay the same. Pick a purpose (to accelerate growth, to invest in headcount, to build the product) and structure your budget around that overarching goal.
2. Outline operating expenses and assets
Once you understand what your investment priorities will be, you can start formalizing your budget. Get set up with a basic spreadsheet (pro tip: choose something that integrates seamlessly with your payments and invoicing process to minimize headaches down the road.)
Start by taking stock of what you already have (assets) and outlining the amount you plan to spend acquiring other necessary resources and materials (expenses.) Most businesses have to put an initial cash outlay toward jumpstarting their operation, and startups are no exception.
You can separate operating costs into two categories: one-time and ongoing. One-time operating costs might include office equipment, software, permits, licenses, vehicles, and initial inventory. Ongoing operating costs are things like rent and employee payroll. Use both of these expenditure columns to understand your upfront and monthly spending.
Once you have the wireframe in place, you can (and should) get even more granular with:
- P+L Statements: For early startups in the “pre-revenue” stage, P+L statements might not seem necessary. After all, if you’re not driving revenue, the profit column will be a big fat zero every month—a bit demoralizing. But these reports provide a helpful snapshot of your spending. It’s good to get in the habit of running them as you scale your business.
- Financial Forecasts: Unlike a budget which is a roadmap for spending and earning, financial forecasts are used to gauge how well a business is meeting those goals. Changing market conditions might mean that your initial budget becomes unrealistic, and forecasts can help you understand when and how to course correct.
Your budget will be a living document. Look at it frequently (at least twice per month!) to track progress toward your goals. Next time you set out to fundraise, you’ll have plenty of documentation and data to help tell the financial story of your business. Setting up a strong budget now will help you inspire confidence to investors down the line.
3. Calculate overhead, estimate variables
Fixed costs aren’t going to change each month (utilities, rent, etc.) but variable costs will fluctuate. Understanding the combined expense of both will give you a monthly snapshot of your operational overhead.
Your biggest variable costs will depend on your industry and your overall spend. If you’re building robots, for example, your variable costs might be mostly related to materials—which are subject to inflation and changes in shipping costs.
High-growth tech startups typically see variable costs increase in tandem with user growth. Variable costs may be small individually but as you grow they become more significant. Plan ahead by building assumptions for user growth into your budget.
And remember that you’ll probably need to hire more employees to support an expanding customer base. Software costs — your tech stack, productivity tools, email, etc. — will change as your headcount grows, so it’s easy to map out and plan for those changes.
What’s your burn rate?
High-growth startup founders should be using their budgets to monitor a few key metrics, including the burn rate of their business. That’s the speed at which capital is being used before driving any positive cash flow. The burn rate is often measured by the amount of cash the company is spending per month. A strong budget will keep you aware of your burn rate and provide a clear picture of how much runway remains at your current operational spending level.
4. Invest early in operations and people
In the early days of founding a startup, you probably won’t be bringing any cash into the business through sales. In that case, you need to use your budget to move the business incrementally toward that goal. The first hires you make will have a massive impact on your business. Make sure you put dollars toward finding superstars who believe in the product you’re building, understand the market you’re entering, and share a sense of vision, mission, and values.
Research your industry to determine which roles are most important early on. Invest in the key areas of your business once you’re confident in how they are going to contribute to growth. For example, SaaS founders will likely want to invest early in operations and product hires.
Equity is a bargaining chip—use it wisely
A dedicated, driven, highly qualified team is a top ingredient in driving growth. But it can be difficult to find the right people to bring onboard in the early days of any startup. You may have to lure talent away from companies with higher salaries, better benefits, and more security. That’s where you can get creative with your capital.
Offering early employees equity in your business can help foster a sense of ownership and make up for other gaps in the total compensation package you’re able to offer. While you may technically have enough cash in the bank to offer market rates for senior roles, you have a timer on when that capital runs out—equity helps you extend that timer. It also incentivizes people to work harder on making the business succeed.
Having said that, you can’t offer equity to employees until your company has been through a 409-A valuation. At the early stages of a startup, valuation is just based on investor opinion and guesswork. Fingers crossed it will be worth much more later on, but everyone (employees, investors, founders) understands that equity value may also go the other direction and be worth less. A valuation is the first step in offering and expressing equity packages to employees.
You may also want to onboard tools and platforms that can keep your costs down and improve efficiency. For example, many startups choose to use Carta to manage their cap table, get 409A valuations, and stay compliant. Finding the right tools that automate or streamline workflows can save you time and money.
How much should you plan to spend?
Payroll is typically the biggest spend for startups and founders should plan to invest anywhere from 20%-50% of their budget on this cost. While the size and focus of the initial hiring round can vary depending on your industry, many startups choose to invest strategically in engineering, operation, and sales/marketing early on. These teams can get the core business engine running, jumpstart customer acquisition, begin driving revenue, and sustain growth over time. Keep in mind that over-hiring early on can create too much financial strain, so be capital efficient and prioritize the roles that will drive growth.
5. Add a contingency fund into your monthly budget
It might feel tempting to put all your capital to work immediately. But we live in uncertain times—and having a contingency fund built into your budget will give your business the ability to weather unexpected events.
Remember, the point of a startup budget is to get your business to the next growth milestone. Contingency funds can help you keep making forward momentum even if something goes wrong.
How much should you plan to spend?
A contingency fund is a portion of money that gets added into your monthly budget as padding. It’s available to dip into when unforeseen costs and challenges arise. You’re not affecting your overall runway if you end up spending this money.
Contingency funds are different from emergency funds, which are set aside for exceptional circumstances and not tapped unless something out of the ordinary happens. The exact dollar amount of your contingency fund can vary based on how much money you’ve raised and the type of industry you’re in.
6. Monitor your cash flow
Most high-growth startups don’t have revenue out of the gate, so you won’t be seeing the typical structure of cash flow reflected in your budget immediately. Having said that, there are some best practices you can start implementing early on that will set you up for smart cash flow management down the line:
- Reduce your pull on cash funds when possible. Remember that you have other financial tools at your disposal besides liquid capital, like credit cards.
- Be deliberate and strategic about when you pay bills. Paying close to or at the due date can help you conserve your cash.
- Maintain constant awareness of the outflow of funds. Cancel any unused subscriptions, weed out unnecessary expenses. Don’t let recurring charges accumulate and create unnecessary drag on your cash flow.
When you do start driving revenue, an effective budget should help you spot potential gaps in cash flow and take early action to course correct—either by securing more funds or negotiating with suppliers and lenders to make more sustainable agreements.
Hopscotch Flow helps you control your funds with a higher level of sophistication and infuse money into other parts of your business so you can grow strategically rather than dilute your ownership in exchange for capital.
7. Stay in the entrepreneurial mindset
Developing a disciplined spending strategy can be challenging for early-stage startup founders. When you suddenly have access to gobs of capital, you might not be as inclined to look for those creative shortcuts and entrepreneurial workarounds. Keeping a sharp eye for opportunities to reduce costs and save money will serve you throughout every round of fundraising.
Looking to set up a streamlined payments process designed for growth? Use Hopscotch to manage your accounts payable and receivable in one place. With full visibility on what’s coming in and going out, you’ll always have your finger on the pulse of your business.