Business Planning: Startups vs. Large Organisations

In a large organisation with a stable environment, predictable competition, and well-understood consumers, planning consists of a short-term operating plan and a 5-10 years long plan. The budget numbers typically vary by a small fraction of last year’s values, unless the management is investing heavily in a new plant or acquiring a company, or any other major changes.

Overall, the outcome of the company wouldn’t fluctuate too much. But this stability shouldn’t be taken for granted and lead to complacency, especially when it comes to budgeting.

So how can you better plan for such a stable environment?

Preparing a Budget in a Stable Environment

A few weeks before the start of a new financial year, various teams in large companies get together (probably for the first time in months) and go through the motions of writing something down on paper just to have the budget done with. Like most organisations, if you follow this cycle of Dr. Jekyll and Mr. Hyde behaviour towards budgeting, expect the process to end similarly – in a tragedy.

The main reason for a budgeting activity is to formulate a better plan for the future – to get a handle of what is required to achieve the revenue targets. Additionally, a budget may also aid in evaluating resourcing requirements. A sound budget is also mandatory to justify a funding request to a potential investor.

Thus unless due diligence is carried out while preparing a budget, your business may be in danger of facing cash flow risk going forward. This due diligence, along with a strong framework, should be provided by your finance team. It is vital that the finance team is involved throughout the year in planning, and the strategic decision-making process to prepare the various types of budgets.

Short-term & Long-term Budget

A budget is typically of two types – a one-year detailed budget and a three to five-year long-term budget. The one-year budget is used to predict monthly, weekly and sometimes even daily cash flows and expenses.

A trading company typically prepares a 15-day rolling budget and a rolling Profit & Loss (P&L) because the business is extremely dynamic and the risk management has to be timely and detailed. So if your business has a trading angle to it, I recommend that you have a rolling short interval budget and a constantly updatable one-year budget. Every business nonetheless needs to have a monthly or at least a quarterly budget that will help to plan ahead.

The five-year (or three-year) budget puts long term goals in perspective. Of course, the first year of such a budget has to be in sync with the one-year budget discussed above. Although a longer-term budget may not be as substantial as a one-year budget, you can still make it as detailed as possible by collating the figures based on solid references. For example, a five-year revenue growth may be benchmarked against a five-year industry growth, and a five-year Selling, General, & Administrative (SG&A) percentage rise may be benchmarked against a five-year expected inflation.

In short, a budget is a dangerous animal that is tamed by a structured, well thought out approach.

Let us look at a set of steps that you can follow to do exactly that.

1. Prepare a Revenue Plan

A budgetary exercise typically focuses only on costs, but from my experience, that doesn’t paint the full picture because a lot of costs depend on your strategy and revenue plans. For example, if you are an Indian firm planning on serving customers in Asia, the travelling costs will differ vastly if you serve clients in USA. So, a better approach is to first prepare a revenue plan after discussing with your top leadership about the plans that they intend to roll out.

Very often in small firms, preparing a list of revenue streams can be a challenge because of the lack of information on their customers and sales locations – but the devil is in the details. As a result, their sales team will typically provide an inflated lump sum. One approach is to ask for a list of prospective customers – categorised by location, probability of conversion, and expected deal size. After agreeing on which projects to consider, add a lump sum for other unforeseen new revenue opportunities, but it should be justifiable in terms of prospects.

2. Classify Costs Into Revenue Buckets

Your costs can be divided into Capital Expenditure (Capex) and Operational Expenditure (Opex). Capex is typically a large investment like investing in a new plant or Research & Development (R&D) whose benefit will accrue to the business for multiple periods. It will be helpful if you prepare an exhaustive list of service lines and revenue types and then identify the Capex required for each item. This will ensure that the key Capex item is not missed.

Typically for R&D projects, you can further break down details for on-going versus new investments planned, along with phase-wise commitment information. Such attention to details leads to more realistic numbers and forces the Capex to align more closely with the long-term strategy.

3. Determine Multiples

When budgeting for variable cost items, you can identify multiples from either industry benchmarks or rely on your business leaders’ past experience. So, if your company is in the services industry, with the multiples approach, you can calculate the number of resources required per unit size of project and the volume of respective raw materials required per unit of final product.

As for material or input acquisition expenses, you should break down as much detail as possible. For example, if a media company is acquiring content, it is helpful to identify what form of media – which language, provider, vendor, and other details you can note down.

Similarly, General & Administrative (G&A) and travel costs can be estimated from past experiences, but again there should be quantifiable assumptions behind those numbers. Let’s take travel costs as an example.

Travel Cost (separately for domestic and for foreign):

i. Flight fare: No. of trips multiplied by Fare per round trip (including Visa etc.)

ii. Hotel Cost: No. of trips multiplied by Average hotel stay * Avg. per day rate

iii. Local Conveyance: No. of trips multiplied by Average fare per trip (normal taxi fare, etc.)

The key is to ask for details and break down any cost into its components to get more clarity and base the numbers on a strong foundation.

4. Prepare Estimates for all Financial Statements

Typically, small companies will only project their P&L along with Capex on – don’t make this mistake. You should estimate both P&L and balance sheet, so that cash flows can be estimated. Also, this brings the focus to exact funding requirements including sources of funding and associated financing costs. Probably the most valuable commodity for an investee firm is cash and without a diligent mapping of both P&L and assets and liabilities, the business may find itself with insufficient or untimely funding.

5. Integrate

Once you’ve planned your budget, it is imperative to run through them with the Sales, Procurement, HR, R&D and other department leaders, along with the top management or board to check the sanctity and to ensure that your budget makes sense as a whole.

A diligent budgeting process enforces discipline in a business. This discipline is especially important for a start-up to mature and grow without hiccups. In sum, budgeting is an indispensable business activity that shouldn’t be seen as a necessary evil, but rather as an important value generating step in a young business’ growth.