Rolling Budgets: The How, When, and Why for Fast-Growing StartupsAug 18, 2023
As a Leader, it's vital to have an accurate and flexible budgeting and forecasting process in place.
The rapidity and fluidity of start-ups make the traditional annual budgeting process feel inadequate.
I don't know how often I've created a budget and within 2 months (or even less!), it's out of date as the company has changed direction. I've even got a company that completely changed their business model within 4 months as they couldn't get PMF! Back to the drawing board....
So for early stage companies that are changing quickly, monthly rolling budgets and forecasts have emerged as an effective tool to keep start-ups agile, future-focused, and financially sound.
Just a small warning, once PMF is embedded and the business is more stable, it may be time to switch back...
Why Choose Rolling Budgets?
Rolling budgets offer a dynamic approach to financial planning, ideal for fast-growing startups and early-stage companies. They provide the flexibility to adjust your financial plans to the real-time circumstances of your company.
While traditional budgeting provides a static financial roadmap for a year, rolling budgets give you an updated 12-month forecast every month. This method lets you continuously adjust your projections based on the latest available data and evolving business conditions.
This is particularly important when you are closely managing cash runway.
As the monthly cashburn can change rapidly within these smaller businesses - you need a more accurate way of forecasting runway than looking at current month's burn.
You can't do this if your budget is no longer accurate and needs to be updated.
How Do Rolling Budgets Work?
A rolling budget typically works on a monthly cycle. At the end of each month, you update with current month actuals and you can either add a new month to the end of your budget period, keeping a consistent 12-month projection or you can keep it to roughly 2-3 years.
I prefer the latter, so I can see the longer term cash runway situation. I like to focus on the KPIs and ensuring that the current trend is heading in the right direction.
For example, If you had a conversion rate of 3% in your budget for the next month, but you had only achieved sub 2% for the last 6 months, then the budgeted KPIs requires further adjustments and conversations with the stakeholders. How can they bridge this 1% gap and when do we think it can be achieved? Is this going to affect our hiring plan? Cash runway?
When is a Rolling Budget not useful?
While the business is changing rapidly, rolling budgets can be very useful.
When the business is more stable as far as Revenue and Business model is concerned, rolling budgets may be more of a distraction than a useful tool.
Instead of using the Leadership team's (and your!) time reforecasting constantly, it may be much better to spend that time improving margins and processes, growing the business and ensuring that the targets that were set with the Board are hit. It's a fine balance, so just keep this one in the back of your mind.
Involving the Leadership Team
As your company grows and becomes more complex, it's beneficial to involve the entire leadership team in the budgeting process. This engagement ensures the budget reflects all aspects of your operation.
During these later stages, a quarterly review and adjustment may be more practical. This frequency still provides a rolling view of the financial year ahead while giving enough time to observe trends and developments in each quarter.
Rolling budgets are not just a finance tool; they're a vital strategic instrument for early stage businesses. They facilitate better decision-making, encourage forward-thinking, and provide a clearer understanding of your start-up's financial position, particularly around cash when cash is tight. Understanding how to implement and manage a rolling budget is an essential skill for any Finance Leader navigating the rapid growth of a start-up. As well as understanding when to switch back to a more static approach.
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