BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

March 4 2014
by Scott Johnson

Time for Agile Budgeting

Once a year, usually in the fourth quarter, companies create a budget for the following year.  The process starts with growth aspirations and goal setting, moves to planning spending in different parts of the company needed to achieve those goals, and then painfully paring back to what resources the company can actually afford given resources available.  It is no small effort.  It requires a fair amount of time from the people who can least afford to give it.  But the time is worth it because variable compensation, hiring, and fundraising plans all key off of the budget.  So I am a fervent believer in having a well thought-out plan with buy-in across the organization.

However, there are two big problems with this process.  One is that, come September, visibility is reduced from 12 months to the year’s 3 remaining months.  This is akin to driving fast at night without headlights.  The other problem is that startups learn as the year goes on that the assumptions that went into the model are wrong.  The plan quickly loses its usefulness as a measurement tool – akin to navigating with obsolete maps.  So, startups everywhere are driving at night without good maps or headlights.

One company comes to mind that nearly fell prey to this.  Cash was tight, and the company was asked to put a plan together to get to year-end.  Which they dutifully did, and the cash need we found wasn’t too bad.  Collective sighs of relief were heard until the question came up “how much cash do we need to clear the trees?”.  Uh oh.  That prompted a full year, completely off cycle budget process that showed an entirely different and larger cash need.  Getting through the year is great.  But young companies should always have 12 months visibility.

This is why I am starting to really like what’s called a “rolling budget” that better fits the dynamic nature of startups.  This process forces updates to the budget more frequently – quarterly or even bi-monthly.  Yes it takes more time from management.  Yes, it makes metrics-driven variable compensation harder.  But knowing many months ahead of time about a need to cut costs or raise capital could well keep an otherwise good company from needlessly driving into a ditch.  We all love agile software development.  Perhaps it is time we used more agile budgeting to go along with it.

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