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Budgeting For A Digital Startup - Do it, Or Die

How to avoid a startup nightmare

10Jan

Budgeting is one of the most critical factors in the success of a digital startup company.

With so much hype placed on creating a buzz or the engineering of viral social media campaigns, and with many investors caught up in the buzz and enthusiasm of a digital startup, many new companies fail to do the basics.

In 2014, US tech start-up Kitchit seemed to have the world at its feet. Three bright millennials had bagged USD$7.5 million in funding and were receiving rave reviews for their online service. They had the buzz, and they had the money. Yet, it took less than two years for this multi-million-dollar starter to collapse.

Their statement on why they had to close their business is telling.

'We've navigated five years and made the most of every dollar raised. Nevertheless, investment runways are finite, and unfortunately, ours reached its end at a moment of substantial upheaval in the food-tech world,' the co-founders wrote.

Notice who and what the co-founders held responsible for the business failure. They blame the limited investment and upheaval in their industry. Kitchit Made the fatal mistake of relying on its investors and an unrealistic view of the market they were in and not on sound budgeting.

Maybe one of the reasons why so many small digital startups fail to budget properly is that budgeting is all about restrictions. And let's face it, most millennials don't like restrictions.

In 2015, the Sydney Morning Herald reported that around 95% of digital startups would continue to fail.

And, while there are just as many factors that go into start-up success as there are that result in failure, poor budgeting and poor financial management remains at or near the top of the list.

Budgeting your small business start-up gives you vital and realistic knowledge. And with that knowledge comes power. Among other things, budgeting gives you the following:

- Control over your cash flow

- Insight into misdirected and wasteful spending

- Control over your costs

- Manage debt and,

- A realistic vision for reaching your financial goals

The Need for Financial Discipline

Behind every successful budget is an attitude moderated by financial discipline.

Your budget is a road map that needs monitoring, updating, and regular review. Without financial discipline most small digital startups will continue to find the potholes rather than the pot of gold at the end of the road.

Preparing a Startup Budget

'A great idea does not result in dollars in the bank', says Kym Butler of Butlers Law and Business. 'If you are passionate about starting your own online business, the first step is to get on the phone and talk to your accountant.'

A startup needs, under the guidance of an accountant, to be able to prepare realistic budgets that at least cover expenditure, sales, and cash flow.

Determine Your Break-Even-Point

Determining your 'Break-Even-Point' is crucial for business survival. Unless you know this critical component of your business - and can achieve it - there is a good chance you may not survive.

Every business and every household must know the minimum amount of income required to cover the cost of staying afloat.

I know that sounds obvious, but you wouldn’t believe the number of times my clients say things like, 'It’s a good business, but it’s just overwhelmed by debt.' 

Well, if it were a good business, why are they closing the doors?

The mountain of debt of failed businesses is a reflection on that business’s profitability and viability in its current form. Often, the reason people make these types of comments is because they are not across the numbers and simply don’t know the true level of expenses in their business, nor the level of sales required to cover their costs.

The Break-Even point is the level of sales required to cover the costs of the operation. It is the point at which no profit is generated nor any loss incurred - where the business is neither going forward nor backward. Calculating your break-even point is critical for a business owner. Apart from crystallizing precisely the level of sales needed to keep the doors open each week the exercise will also help you to:

- Determine the level of your trading losses and how long they may be sustained

- Set or adjust the prices of goods or services in response to a competitive market

- Determine whether the cost structure of the business is appropriate or if it needs to be addressed.

The Australian Government has seen the potential of energizing start-up companies and are promising to back that potential with a $1.1 billion innovation package, including tax breaks for start-up investors. 

The offer of capital is both encouraging and concerning. Yes, there is potential. But there is also a risk. A smart start-up will not hide under a blanket of capital, hoping the risk will simply disappear.

If Australia is to move ahead in digital business, we need to be more than smart marketers who know how to create a buzz. We need to be smart with our money as well.

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