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The Art of Startup Finance: Financial Budgeting - Your Operating Budget - YouTube
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Kauffman Founders School, Bill Reichert, The
Art of Startup Finance, Financial Budgeting:
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Your Operating Budget
>> Now for the hard part, we're going to talk
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about budgeting and forecasting.
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This is frequently the toughest thing for
startup entrepreneurs because we're asking
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them to predict the future.
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Hitting your budget may be the difference
between success and failure.
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And I'll tell you, the most frequent reason
that venture capital investors fire founders
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and CEOs is because they miss their budgets.
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You want to be the CEO that hits his or her
budget every time.
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So let's see if we can offer some approaches
to make the budgeting and forecasting process
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a little bit easier for you.
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Now don't worry, we know it's not going to
be right.
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That's a given.
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But at least it frames out your thinking so
you know if things don't work out the way
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you expect, you know exactly which way they
worked and which way they didn't.
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So let's start with the operating budget.
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The operating budget is the detailed plan
of how you're going to spend money and hopefully
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earn revenues over the next year.
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When you do your operating budget you start
by figuring out what are the key drivers for
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my expenses and for my revenues going forward.
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What are the things that are going to cause
me to spend money and enable me to make money?
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Think those through.
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Most entrepreneurs, they make the mistake
of finding some template, some Excel template
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out there.
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And then trying to plug their numbers into
somebody else's framework.
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I would urge you instead, start by figuring
out the design of your business and the key
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drivers of your business.
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So the key drivers of expenses, generally
those are going to be related to people; the
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people you fire for different tasks in the
company.
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Your revenues are a function of your customer
contact.
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So in order to have customer contact you have
to have those marketing and sales programs
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in place in order to generate those revenues.
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When you're putting together your operating
budget you want to put it together using frames
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of reference that are going to make sense
to your whole team on the inside as well as
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to your board of directors and investors on
the outside.
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And that's more likely going to be an around
your milestones rather than the traditional
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accounting categories.
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So a term you might hear is a term called
milestone鈥慴ased budgeting.
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And this is a really powerful concept for
developing your operating budget.
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Instead of designing your budget around just
the plain old accounting terms that your accountant
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might use, instead frame your operating budget
around the key milestones that you need to
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hit.
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So for this budget period, one of your key
milestones may be we need to build and ship
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a product.
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So you're going to organize your expenses
around that process, that milestone of building
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and shipping your product.
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Unfortunately, I got to tell you, once you've
put together your operating budget, your work
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has only just begun.
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As I mentioned, it's almost certainly going
to be wrong.
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So you're going to have to iterate.
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How often should you iterate?
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Probably you're going to have to make adjustments
every quarter, certainly every six months.
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Prepare your investors for that.
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Prepare your board for that.
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It's going to be a continuous process, especially
during the early years.
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But once you get the processes down for putting
together your operating budget, it will yield
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enormous results for you in helping you manage
your company more effectively.
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So entrepreneurs ask well how long should
we do an operating budget for.
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What I would recommend, you do a 12鈥憁onth,
monthly operating budget.
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And then do the two following quarters just
to get some sense of visibility into the period
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beyond.
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How much detail should I put into my operating
budget?
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Well, that's going to change over time.
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In the early days of your company, you're
not going to have a lot of data on which to
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base a very, very detailed operating budget.
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As you have more experience with your company,
as you go through different years of operating
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budgets you're going to be able to fill in
more and more detail.
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Get this question all the time from entrepreneurs.
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Entrepreneurs are wondering, so how much cushion
should I build in to my operating budget.
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Because, you know, entrepreneurs know if they
miss their budget it's a really bad thing.
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I encourage you to put a little bit of cushion
around each of the elements of your operating
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budget.
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But do not do what we've seen some entrepreneurs
do, which is they put a big plug number at
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the bottom that says this is our cushion number.
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And that doesn't help you.
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Investors are just going to look at that and
they're going to say this guy doesn't really
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know how to budget.
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Instead try to incorporate as best you can,
your best guesses with a little bit of cushion
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around each of the elements of your operating
budget.
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And hopefully you'll come in under budget
on terms of your expenses and over budget
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in terms of your revenues.
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