It’s that time of year when the word ‘budget’ gets a lot of airplay as we trawl over the implications of spending cuts and boosts to our nation’s operation. We innovators and entrepreneurs feel particularly on edge as we weigh up the commitment to long term innovation against other, more short-term needs of the country. It’s a worthy conversation to have, the short-term agenda against a longer term one, but I’m not going to have that conversation here.

Instead, I wanted to share some observations I am making in assessing a number of startups looking for investment. I am actively seeking to make some angel investments, but I also spend time mentoring and advising startups.

Commonly, the financial model and budget is disconnected from the realities of execution, let alone the vision.

Sometimes, the startup financial plan feels like an afterthought, a due diligence item to tick off. A bunch of numbers that are going to be wrong anyway. The most important number is the huge global market you’re going to conquer, right? Wrong. If I can’t see a considered, strategic plan towards that market, I’m afraid I don’t believe you.

I was watching 7.30 on the ABC last night and Stephen Bartos, public finance expert and former high ranking bureaucrat, made a comment about the Federal Government Budget which is a brilliant way to describe why a financial plan and budget is a living, breathing fire pit of hopes, dreams and a suggested pathway towards them.

He said, “the budget is a lot of things; it’s an economic document, it’s an accounting document, it’s a statement of priorities but above all it’s a political document… it’s its [the government’s] statement for its political future.

In other words, your financial plan and budget is your statement of your vision and strategic future. It is not just a set of numbers that are going to be wrong. Of course they are going to be wrong. We know that, but the art and science in constructing your vision in numbers is the key to achieving that vision. Implicit in it are the baby steps you will take towards reaching your goal. It carries every “gut-feel” assumption you are making and gives you a painstaking pathway to validating these. It will drive you, with almost desperation, towards a better result because being an entrepreneur means you’re an optimist; you set the bar high and then pedal like mad to reach it. 

Here are just a few things to think about when considering how to approach your financial model and budget for an early stage startup, especially if you’re a first-time founder.

1.    Have you achieved problem-solution fit or product-market fit?

Have you been able to prove, with reasonably robust data, that your solution solves a real problem (problem-solution fit) and have you been able to confidently prove that enough people in your market will pay for your solution (product-market fit)? If the answer is “no” to these things, then your financial model should indicate an approach, and timeframe, for validation. It wouldn’t suggest you will scale quickly to dizzy heights from the time investment hits the business. It wouldn’t show oodles of cash ploughed into paid marketing. It wouldn’t show you put a full team on from day 1.

2.    Capture all your assumptions in data points that drive your model forecasts.

This is different for every business and hard to explain in a short paragraph here. In my venture, MoneyBrilliant, our model gave us the testing ground for every aspect of our operation. Our CAC (customer acquisition cost), our conversion rates through the funnel, churn, product take up, our customer service requirements (customer to customer service head ratio), our occupancy costs linked to FTE, cost of sale assumptions around enterprise and SME sales etc.

Your model should have a sheet with all your assumptions that link and drive the numbers in your P&L and cashflow. You can play with these assumptions to test out scenarios. A very good exercise is to do a best case (usually your first model) and a worse case. What happens if your CAC doubles or your growth halves? What changes would you make to expenditure in this scenario? What is the impact on the long-term result and what you’re seeking in investment?

Remember, if you’re in an early stage tech startup, your focus is learning how you can build a sustainable business. Your financial model should show what you need to learn, ie a set of assumptions you will need to validate before your money runs out. Start validating the riskiest ones!

3.    What people do you need to succeed and how much do they cost?

Communicating the talent needed to grow your venture is critical for investors. It shows a level of sophistication in your management expertise and leadership skills, something you will need to have, or hire in, as your venture grows. The temptation, in a lean plan, is to under-cook people costs, expecting that everyone wants to work in a startup. The reality is the employment scene for good talent is highly competitive. Do your research about the salary expectations of talent at different levels. Be open to combining a realistic salary with share options or equity. The strength of your people will underpin success. Show how you bring skills into the business as you hit milestones. It should be clearly linked to strategy and growth.

4.    Demonstrate that you have a clear focus

Stephen Bartos describes a budget as a “statement of priorities”. In an early startup plan this is critically important. You may feel your idea has broad reaching application. Great, but you should have a fairly strong sense of where your early, strongest opportunity is and show a focused plan to exploit that. In your pitch deck you can talk about other future opportunities.

5.    Zoom out, zoom in

Before I got into the exciting world of startup, I was a media strategist and planner. That means, I've spent days on end in excel planning millions of dollars in advertising for brands. You learn the art of zoom out, zoom in.

You have to be able to sit back, zoom out, and look at an advertising plan with all the different media channels, some short bursts, some longer sustaining blocks, and see the plan come to life. Do all these pieces connect together? What does the excel plan look like in real life, with real people engaging with it? Are there gaps that need filling? Does something look out of place?

You also have to be able to zoom in to a particular part of the plan and pull it apart and pressure test it. Is that the right weight? Is it realistic to meet that timeframe for that channel? What are the resources and effort required to deliver that piece of the plan? What are the risks? Do I have enough firepower in this plan to reach the campaign objectives?

At the end of the day, you need to sell the plan to a client and expect to be questioned on any and every aspect of it. The only way to be prepared for that is to be deliberate in the way you put the plan together. Embody it. Question it.

Understand that what might look like a set of numbers and blocks on a page will be a big statement of vision from a brand when the campaign goes live; the culmination of the hard work of a team, executing to a plan. 

It’s the same in startup. It’s where a big idea meets its future.