Budgeting as a strategic tool

All companies should invest in budgeting and financial planning to support sustainable growth, build investor confidence, and increase strategic agility. This is particularly true when a company is targeting milestones that would either unlock additional funding, guarantee continuance or open doors to exits.

In that exercise, key stakeholders should be involved - which could include investors, management team and leaders of different departments. Focusing on discussing revenue targets (and the required costs to achieve it), operational expenses (ie, personnel, tech stack and external services) and how to finance operations.

For VC-backed companies, budgeting becomes a critical exercise in understanding capital efficiency- how long the runway is, and when the company may need to fundraise, cut costs, or, in the worst case, shut down. When embedding scenario planning on the process, risk mitigation is enhanced and internal alignment and accountability are reinforced.

Besides that, most companies that rely on external funding have to obtain approval in their budget as part of the clauses set on their Shareholders Agreement. By the last quarter of the year, the Board of Directors has to approve the upcoming year’s budget.

As discussed earlier in this series, this should be a continuous process—closely linked with reporting to track actuals versus plan, explain deviations, and adjust strategy accordingly.

In practical terms (on a simplistic approach), companies can start from the levers that build up revenue - like CAC, Cost of Sales, Average Ticket or ACV, Net Revenue Retention and Churn (if in a subscription model). With that, the top line of the Profit and Loss plan is set (revenue) as well as Cost of Sales (therefore gross margin is calculated). After that, operational expenses can be derived from the past or from the assumptions made by the management team, such as the other team members necessary to achieve targets, the tech stack necessary to do it and overhead costs. 

If a company is relying on funds raised from loans, for example, those should also be included in the planning as it affects the cash at hand in a certain period but also the cash outflows to repay such obligation (which affects runway). 

Ideally, this process of budgeting and financial planning should be performed (or at least reviewed and approved) by someone with financial literacy and the necessary skills and context in which a company is operating. If there’s no one else on the team, external parties such as interim CFOs or a member of the investor’s team could be helpful.