For many entrepreneurs the idea of mapping out a year-long budget for your business can sound pretty pointless. Things rarely go according to plan anyway, so why bother?
But no matter how many times you hit a pothole or need to take an unplanned exit along the way, it helps to have adequately planned for all the possibilities of your journey as an entrepreneur.
Budgets are critical to navigating the road less travelled and for SaaS businesses in particular, establishing a well thought out spending timeline is critical to surviving the journey through the valley of death.
Many find the budgeting process surprisingly energizing, because it inspires them to imagine their own potential in great detail. If you can believe it, you can achieve it.
In this blog, I’ll take you through the steps I recommend my clients take when they sit down to create a budget.
1) Pick a destination
“Begin with the end in mind.”
This quote is from Stephen Covey, the author behind the well-known 7 Habits of Highly-Effective People. Just like any adventure, the first step in establishing a budget is deciding where you want to go.
Are you aiming for a particular monthly recurring revenue (MRR) by year end? Do you want to double last year’s sales? A goal will help you determine the rate at which you need to grow, and what resources you’ll need to achieve that growth.
2) How fast do you need to travel?
Think of it as a road trip. You’ve picked a destination (revenue target) and an arrival date. You now have something to aim for, but keep in mind that there are speed limits along the way.
The difference between where you are today and where you want to go determines the MRR growth rate you must achieve. Most VC’s aren’t interested unless you have 10 per cent month over month (MoM) growth. In reality, 90 per cent of companies will be closer to four or five per cent MoM growth.
3) Who is coming with you?
Now that you have set aggressive revenue targets you’ll need some resources to help you get there, including things such as passengers and fuel stops. In business terms we are talking about marketing (lead gen) and sales support.
Do you need to hire a team? Do they require a travel budget, advertising spend, trade shows?
This step involves zooming in to see what it will take to get you to your final destination.
4) Get a little creative
Imagine a well placed ferry along your route, which enables you to stretch your legs or get some sleep while still moving forward. Strategic channel partners can provide incremental revenue boosts to your sales strategy.
While channel partnerships can be a great way to bolster your revenue, be cautious not to chase relationships that aren’t very obviously a good fit for both parties. Be aware that these relationships can be distracting; be selective, because most will not necessarily contribute as you had hoped.
Do not assume that others will sell your product or service because they love it as much as you do.
5) Road tolls and gas money
Now that you have a good sense of your sales strategy (MRR growth plan), what are the incremental costs (of goods sold) that are expected along the way?
On our road trip, we’re talking about gas money and road tolls and for your SaaS business, it may be merchant processor fees, server costs, mobile fees, etc.
The average variable costs for SaaS companies can be up to 20 per cent of revenue, so make sure you plan accordingly.
6) Drive smart for greater sales and marketing performance
Critical thinking is required to ensure your sales and marketing activities will generate a significant return on your investment.
Marketing activities bring eyes to your product and sales efforts close sales to drive your MRR. Together they make up the cost of acquiring a client (CAC) and need to work cohesively.
7) Research and development
Consider both the short and long-term needs of your core product. A strong foundation is required to build a robust product, but maintenance and feature updates are also anticipated costs that need to be factored into your budget.
8) Don’t forget overhead
Imagine not stopping at Tim Horton’s on your road trip. Highly unlikely, right?
For early stage companies it can be easy to forget to build insurance, rent, legal and accounting fees into operational budgets. But these, like coffee, are required to get you through those long hours on the road.
9) What can possibly go wrong?
The final and arguably one of the most important steps in this process is budgeting for risk.
Ask any entrepreneur and they’ll tell you that things hardly ever go according to plan, especially in the early days when things are most precarious. The most common variance is revenue delay, so make sure you budget in some extra funds for risk management.
Well-equipped travellers always have a spare tire, a car-jack, a first aid kit and other emergency preparedness gear in their car. While the hope is you won’t need them, it gives peace of mind knowing they’re on hand.
Susan Richards is the co-founder of numbercrunch, a one-stop-shop for business financial services. The company offers cloud-based bookkeeping, and virtual CFO and controller services. To learn more or to request a quote, visit numbercrunch.ca.