What are the best ways to manage financial risks when budgeting for startups? (2024)

Key takeaways from this article

• Maintain a cash reserve:

  It's like having a safety net that ensures you can keep operations afloat during tough times. Building this reserve means you can tackle emergencies or opportunities without sweating the bank balance.

• Map goals to KPIs:

  Aligning your startup’s objectives with clear Key Performance Indicators helps to focus resources effectively. This strategic move ensures every dollar is spent with purpose, driving towards those all-important business milestones.

This summary is powered by AI and these experts

• Tom Mayes CFO | Start/Scale ups | Web3 | Payments…

• Tom Mayes CFO | Start/Scale ups | Web3 | Payments | Blockchain | FinOps

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  Key Considerations;Market Analysis: - Understand target audience & market demand. - Analyze competitors' strategies & market positioning. - Evaluate potential market growth & saturation levels.Revenue Streams & Cost - Identify diverse revenue sources (e.g., product sales, subscriptions, services). - Monitor pricing strategies & adjust according to market dynamics. - Efficiently manage costs, production expenses, & overheads.Customer Experience & Retention: - Prioritize exceptional customer service & user experience. - Gather feedback to enhance products/services based on customer preferences.Monitoring these aspects is crucial for sustainable growth, guiding decisions related to market expansion & financial planning.

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• Mitchell Cohen CFO CEO COO Advisor/Board Member/Mentor -Creating Value while solving problems- || Significant Public Company Expertise.

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  Startup or other, always sensitize your models. Expect the unexpected. Be realistic.We all know there's no such thing as a bad business in Excel.

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• PANKAJ GUPTA CFO at Shapoorji Pallonji Finance/ Ex-Kotak/ Ex- ICICI/ Ex-Tata/Techno Savvy CA/CFO Next 100

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  Sensitivity Analysis or multiple scenario workings is must for start ups as being a greenfield business the outcome may be uncertain. Hence the scenario analysis can help in assuming eventualities in case of stress scenario and accordingly have appropriate risk mitigation strategies and back up plans in case of early warning signals rather than allowing the situation to aggravate and resulting in unfavourable outcome.

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• Jeff Rasmussen Providing SME Owners The Exact Help They Deserve | Fractional CFO | DFY 20+ Leads per Week | Cost Reduction Thru Automation | Leadership | Author | Award Winner | Jesus Follower✝

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  The term "budgeting" for a start-up is probably a misnomer. There is typically very little basis for a true budget. What these tend to be is a SWAG. In any case, whatever the management team thinks the initial costs will be...add 50% to that. Don't forget to budget for the cash burn. It will likely be many months before there is positive cash flow. It almost always takes longer than anyone thinks. It's not possible to have Too Much capital at the outset.

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• Manish Sharma Finance and Strategy Leader | Growth Catalyst, Transformation, Optimisation | ISB (Exec. MBA), Wharton, LBS, CIMA, ACA, ACS

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  Develop different scenarios based on different levels of revenue and cost and prepare cashflow projections for each of these scenarios. This would help in thinking and preparing some plan of action in different situations. However, be prepared mentally that the actuals may be different from the plan or scenarios projected. This will develop ability to think creatively and respond thoughtfully during uncertainty which can become your strength against the competition.

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  My first thought is that for startups a best-case scenario is pointless - the return projections for the expected case already have to be really high to compensate for the inherents risks; and you are expected to be ready to capitalize on move quickly on any positive new developments that occur. My second thought is that the worst-case scenario needs to be driven not by a simple "-XX %" change to sales, but instead by a thought-out set of conditions, e.g. a recession, a slow-down in critical permitting, a strong competitive reaction. Then the scenario model should work through the impact of that set of worst-case condtions upon the independant variables of the business model, not only reflect the formulaic result of lower/slower sales.

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• ROY GAYHART CFO/Controller at JBA Racing and Speed Shop where we make dreams become street-worthy reality

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  A budget model is an essential tool. Modeling allows its user to perform "what if" analyses. Doing High/low modeling (also known as "Best Case / Worst Case") is a basic component of what is needed. Think of this type of modeling in three dimensions: time, revenue and expenses. Your budget model is comprised of many underlying assumptions, all of which must be compared to actual results, again and again on a regular basis.For example, is this phase of the project taking longer than expected? Then management must consider increasing cash inflow or cutting costs, while continuing to endeavor toward the next milestone fundraise.

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• Tom Mayes CFO | Start/Scale ups | Web3 | Payments | Blockchain | FinOps

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  Scenario analysis empowers startups to prepare for market fluctuations. By simulating various economic scenarios, businesses can identify potential challenges and devise contingency plans.Startups often operate with limited resources, making efficient allocation paramount. Scenario analysis aids in prioritizing expenses based on different outcomes. By evaluating multiple scenarios, startups can focus investments on strategies that offer the highest returns while being prepared to pivot swiftly if conditions change. It optimises budgetary decisions, fostering financial stability and growth.In essence, scenario analysis is not merely a budgeting tool; it is a visionary compass guiding startups.

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• Jean Marc Soulié Senior Consultant specialized in Business Intelligence, finance, and business management - financial process automation - expert advisory

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  The system must be able to quickly and reliably create multiple versions or scenarios, as well as variants, that incorporate the variables and define Best Case, Base case, Worst case, xCase... The creation process must take seconds and then allow adjusting the variables and/or data affected by the scenario. You can then compare with other scenarios in a few seconds.

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• ROY GAYHART CFO/Controller at JBA Racing and Speed Shop where we make dreams become street-worthy reality

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  To begin, one must keep in mind that most startups DO NOT operate as they were initially planned. Agility is critical to the startup's success. Personally, I prefer a zero-based budgeting approach during the early life of the startup. Action planning in small step increments is also essential to provide a frame of reference as to whether the startup team is on-track with its initial plan. The startup's agility to adapt and change plans quickly is essential for the startup's success. Funding rounds should be tied to attaining each action step in order for early investors to realize timely appreciation, as well as to increase decision-making urgency to potential investors. The budget is a living document that continually requires modification

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  Validate your assumptions through learning from actual performance. Plan is only as good as the assumptions it is based on. Once there is actual data to analyse, that should be looked at and assessment made as to validity of the assumption within the plan.

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• Jean Marc Soulié Senior Consultant specialized in Business Intelligence, finance, and business management - financial process automation - expert advisory

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  If you have a very well prepared and structured system and process (not having to update manually spreadsheets), what I call SMART DATA, your budgets can be updated regularly in order to automatically have a forecast and/or rolling forecast automatically. As long as it has an automated connection to your transactional databases.

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  A cash plan that details the monthly cash inflows and outflows is critical to having an accurate picture of your remaining runway, and to proactively and effectively address concerns as they arise.

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  See Also

  Startup Shutdown: What happens when a startup fails | Silicon Valley Bank
• ROY GAYHART CFO/Controller at JBA Racing and Speed Shop where we make dreams become street-worthy reality

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  The cash planning and management is a natural by-product of the ongoing budgeting process. Cash flow forecasts must be regularly compared to actual cash flow results. There can be no "theory" when it comes to cash management. Assumptions and algorithm formulae need to be tweaked on a regular basis. The idea of maintaining a cash reserve should be thought of as being comprised of two parts: (1) cash requirements next funding event and (2) a general cash reserve for contingencies (including the possibility of the next funding event moving to the right).

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• Jean Marc Soulié Senior Consultant specialized in Business Intelligence, finance, and business management - financial process automation - expert advisory

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  Cash is live. Your budget must include a CASH FLOW calculation and provide the state of forecast but also the monthy (Month & YTD) analyse of deviations. No cash, no growth. For you Cash flow, you have to use Operating Cash (that include Working Capital Requirement Variation), Free Cash flow (Operating Cash flow- Capex Variation) and Net Cash flow. Becareful, is not easy to automatize this part!

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  Can't overestimate that.No matter how costly professional advice may appear, cost of not obtaining professional advice might be higher.Especially in what relates to setting up complex cross-jurisdictional structures.

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• CA MITESHAN AGRAWAL Think Business , Think Solution, Virtual CEO, Virtual CFO, Governance, Board Committee Member , Risk Management , Investor

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  Focus on generating revenue add such products which become catalyst for your business and do not take too much debt ensure more equity keep cost low and focus on R&D and rest functions may be outsourced on target based this help reduce working capital….each business has its own uniqueness and need advice based on the same

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• ROY GAYHART CFO/Controller at JBA Racing and Speed Shop where we make dreams become street-worthy reality

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  To get to a place you've never been before, find someone who has and knows the way. You're in for the journey of your life and you don't know what you don't know.

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• Jean Marc Soulié Senior Consultant specialized in Business Intelligence, finance, and business management - financial process automation - expert advisory

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  I agree, you have to seek a professional advice. Implanting a system like this is not for Junior Consultant. You need somebody that undertand Business modelind, Data Intelligence Integration and Financial Skills, and a dedicated software to reach expected goals.

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• Mark Cummins Director of our friendly team - Purple Accountants for the best advice for £1 to £10m turnover businesses across Dorset.

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  As accountants we are part of the team.To take on the opposition without a full team is rarely a good idea.Just like making a profit out of your products/services, if you choose your advisers wisely they will return a profit for you on their costs too.

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  An effective way to manage the financial risk when budgeting for a startup is to map its goals and KPIs. Each goal of a startup requires resources to achieve it and these resources have to be budgeted adequately.

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• Roger Criblez, CPA Chief Financial Officer at Emergent Connext, Inc

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  A startup must have an easily understood mission and must keep it focused and on task. Too many cooks and too many ideas that constantly change the mission are a huge threat. Understating revenues and overstating expenses in your budget is necessary as the need to over deliver and under promise is a necessary part of a startups success. Lastly, be sure sure to pay yourself within the budget but, not overly so. Use the KISS principle when ramping up a startup.

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• Mark Cummins Director of our friendly team - Purple Accountants for the best advice for £1 to £10m turnover businesses across Dorset.

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  Read extensively on this topic as it’s an important part of the plan to follow in business. Without “the plan” you may get there but you will be stabbing in the dark. Take advice as early as possible and do t be afraid to pay for advice. The best advice does not come for free. Your advisers make up your team. Choose good advisers if you want a good team.

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  Managing financial risks in startup budgeting is critical. We've found that a conservative approach is key. For instance, during our startup's initial budgeting phase we overestimated expenses and underestimated revenues. This safety margin allowed us to navigate unforeseen challenges without facing immediate financial strain.Regularly reviewing financial data and adjusting the budget accordingly is another practice.When we observed lower-than-expected customer acquisition rates, we promptly reallocated marketing expenses to areas showing better ROI. Establishing clear financial policies and contingency plans also ensured we could manage unexpected risks effectively. This approach has proven effective in maintaining our financial stability.

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• Deepak Singh Accounting Manager at Makse Group

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  To manage financial risks in startup budgeting, start with cautious financial projections and establish a contingency fund. Regularly monitor your budget, create various budget scenarios, and prioritize healthy cash flow. Implement financial controls and diversify income sources to reduce dependence. Consider insurance coverage and manage debt prudently. Seek guidance from financial experts when necessary. These practices help startups mitigate risks, ensuring financial stability and facilitating long-term growth.

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