in2being co-founder and Managing Director Gene Parunak recently sat down with Patti Glaza, Managing Director of ID Ventures. ID Ventures is the venture capital arm of Invest Detroit, “a mission-driven lender, investor, and partner that supports business and real estate projects that will ignite economic growth in Detroit and the region.” Managing “the most active early-stage investor” in Michigan gives Glaza a unique perspective on startup budgeting.
Although in2being and ID Ventures focus on development and investment, respectively, the discussion in this interview centered on a less glamorous, yet very important topic: budgeting.
“When companies come to see us, they’re presenting their vision of what they want to achieve over the next year or two,” Glaza says. “So, they’re giving us really optimistic numbers.”
Even though a startup may use an optimistic revenue forecast to set their goals, they should use conservative or even worst-case-scenario estimates to set their budget. According to Glaza, it’s typical for new businesses to reach revenue goals that match conservative forecasts or are even lower. Budgeting conservatively allows them to manage through the ups and downs of a cash life cycle.
How Often Should Startups Review Their Budget?
Glaza recommends that entrepreneurs revisit their budget every one to two weeks to manage through unknowns by adjusting when unexpected events occur. Having a CPA or VP of Finance handle the fine details of a startup’s budget may be helpful, but an entrepreneur or CEO needs to know where their company stands and be able to explain large expenditures.
Don’t Get Ahead of Yourself
Another pitfall to avoid is paying too much attention to the next big contract. “Just because I’ve got a lead doesn’t mean I’ve got a contract,” Parunak says. “And just because I’ve got a contract doesn’t mean I’ve got cash in the bank.” Glaza adds, “The customer’s willingness to pay does not equal the entrepreneur’s need for timing of payment.” As startups secure bigger and bigger contracts, customers take longer and longer to pay. Without proper attention to budgeting, a new venture may find itself cash-strapped as it awaits payment.
in2being is a full-service consulting company that helps medical technology entrepreneurs bring new medical devices to market. To learn more about our services, contact us today.