April is a month that the general population remembers for April fool’s day or the new school session but business owners most relate it with the new financial year that commences with it. It is, undoubtedly, one of the busiest and most challenging times of the year for startups as they head into another fiscal year. After all, cash flow is the oxygen of business. As reported by a survey, about 80% of startups fail within the first 5 years of business. 29% of these startups quoted a lack of appropriate funds as the reason for their downfall. Improper budgeting is among the top 3 reasons for the dearth of funds among startups. In this piece, we’re going to look at some techniques for budgeting which can help your business keep its head above water in the new financial year.
Closing Old Chapters
Before you head into the new financial year, it is important that you close the previous year of business no matter the level of success you were or weren’t able to achieve. A brief checklist of items that you should definitely cross off before you even begin to plan for the new financial year:
- Calculate advance payable tax
- Clean up your loan accounts
- Prepare a financial report for the past 12 months. This will indicate the circumstances of the firm to potential startup investors.
- File Income Tax returns
- Calculate GST turnover and reconciling GST ledgers.
Heading into the New Year.
Great! You are now done and dusted with the bygone financial year and it is time to look ahead. A crucial part of your preparation for the new financial year involves budgeting appropriately in order to fuel operations for the new fiscal year.
Let’s begin with some basic pointers on how to create a budget in a systematic format:
1. Create a Forecast revenue
Revenue forecast or Profit Loss statement, as it is called in technical terms, is essentially a method of setting goals for the organization. List down the anticipated revenue for the organization. Some pointers for revenue forecasting are as follows:
- Forecast the revenue by both, judgement and quantitative forecasting.
- Use the previous year’s revenue statement in order to make a forecast.
- Try to specifically classify as many income sources as possible. This will give a clearer picture about the revenue streams.
- Review and update the forecast to reflect changes in business
2. Capital Budgeting
Essentially, capital budgeting helps you to evaluate future investments and huge expenses in order to gain maximum returns on investment. It’s a classic replace/repair situation for the assets belonging to the company. For a startup, it might be difficult to go in on all planned investments, and careful selection of investments is pivotal to a smart budget decision. The process for capital budgeting consists of the following 5 steps:
- Identifying Investment opportunities, for example, adding new products to the product lines.
- Creating and evaluating the investment proposals
- Selecting the most profitable investment avenue
- Apportionment: Identifying the sources of funds for investment (i.e. angel investors)
- Performance Reviews of investment
Techniques of Capital Budgeting:
- Payback Period Method: Calculating the amount of time it will take to earn back the investment amount
- Net Present Value Method:
Net present value= Value of cash inflows – Value of cash outflows over a period of time
- Accounting Rate of Return method:
Calculated as: Net Income of Investment / Average Investment. This gives the profitability of the investment.
- Internal Rate of Return: The rate at which Net Present Value becomes 0.
- Profitability Index: Ratio of Present value of future cash flows to initial investment for the project.
3. Timeline Breakdown
Divide the year ahead into small chunks, mostly month-to-month, and figure out how you will fund your operations each month. This will help in arriving at a more realistic budget. There are essentially two types of budget timelines that you need to project- short-term and long-term.
Short Term: Month-by-Month breakdown of the incoming financial year
Long Term: Quarter-by-Quarter breakdown of the next 3 years.
This process will require information gathering and should ideally be initiated 2 months before the end of the financial year. Following are the drivers that will become the variables to consider while initiating this revenue timeline breakdown:
- Customer Acquisition Cost (CAC): Costs incurred in convincing customer to avail your services/ buy your products.
- Marketing Budget: The spend involved in the marketing of products and services
- Cost of Goods Sold (COGS): Costs attributed to the productions of the goods sold via company channels.
- Churn Rate: Cancellations expected per month
- Lifetime Value (LTV): Net profit that can be associated with a future relationship with a client/customer.
Hence, a lot of factors need to be taken into consideration while preparing the budget for your startup before you commence the new financial year. Budgeting will help you efficiently manage resources and provide a helping hand as cash flow is pivotal. Efficient budgeting in the new financial year will help your startup not only stay afloat but make great strides for better revenue and cash flow. Happy Budgeting!