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.