Learning to Budget Should Mean Budgeting To Learn (Video)
Photo by Chris Liverani on Unsplash
Here’s a tip founders can use when their nice, neat forecasts run smack into reality.
I was on a call recently with one of the startups in which my company Findaway Adventures is invested. They’ve been in business for several months, and we were talking about their sales. They put together a beautiful three-year budget, including a one-year projection, and have begun to get some actual sales data.
They’re experiencing some pretty wild swings, quite frankly, which is another way of saying they’re not hitting the revenue targets they thought they would.
This is totally normal for a startup company, especially for an emerging new brand in an emerging category for which there isn’t much data and forecasting is difficult at best. The likelihood of budget accuracy for startups is very low because a single account — gained or lost — can create a huge swing in your budget. (The good news: once you reach corporate maturity, budgets grow more accurate.)
In this scenario, the best you can hope to do is put a stake in the ground on what your budget might be in terms of top line sales and track against that, adjusting expenses as necessary. However, this doesn’t mean adjusting your budget month to month to align it with reality. The problem with doing this is you’re not learning anything you could apply to the business going forward, such as why that major retailer took six weeks to shelve your product rather than two.
So let me suggest a solution we use with some of our companies: we call it 6+6 (“six plus six”).
How the 6 + 6 helps you learn
Using the all-important net sales as our example KPI, first you envision your monthly budget over one fiscal year. As you collect actual data on net sales for the first six months, track this against your forecast in your fiscal year budget. Be prepared for some wild swings and talk about them in your monthly strategic meetings.
Then, in the beginning of the seventh month, use your quarterly retreat to reforecast your next six months based on what you learned in the first six. This new budget is called a 6 + 6 because you’ll be tracking your net sales based on the first six months of actual data and a new forecast for the last six months of the year. In essence, you will now have the original “fiscal budget” and your new “6+6 budget” — two budgets.
Budget forecasting is a big area of concern (and misconceptions) for startups.
Going forward for the last six months of the year you will track actual net sales to both budgets. This will give you learning against your original forecast, AND learning against your latest, or 6+6, projection. Trust me, the learning here is invaluable as it will help you get better and better at budgeting and forecasting as you repeat this process yearly.
Your ability to show learning becomes even more important as you bring on Angel investors or venture capital. They won’t love the hits and misses in your budgeting but they’ll be more forgiving when they see you’ve learned from any failures. Remember, the key to leading from strength is being able to report to your stakeholders — e.g. investors and employees — that you’ve got the bull by the horns and understand what’s going on and what to do next.
Finally, please don’t make the mistake of combining your pro forma budget, which measures P&L, with your cash flow model, which measures overall burn rate and requires a completely different conversation. I see this mistake all the time and it is way important to track your cash separately from the budget. Feels like another blog to me… ;)
I’m pretty gung-ho about the 6+6. If you’ve got a better idea, let me know how you’re tracking your key metrics. I’d love to learn how you do it!
Sincerely,
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All credit to my ghostwriting partner, Dave Moore, who is instrumental in getting my thoughts out in a coherent manner & into these blogs. Thanks Dave!