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March 10 2020 - New York, NY

Basic Budgeting at a Startup: Michael Tannenbaum

Thomas:
Welcome back to another episode of Brex in the black. We have Michael, CFO at Brex and he's going to talk to us about budgeting. So Michael, what are budgets?
Michael:
Budgets are basically proclamations of what you aim to achieve financially. Proclamation might be a little bit of a strong word, but it's sort of your expectation about what you will achieve from a financial perspective in the future.
Thomas:
When should founders start looking into budgeting and when do they need to start really doing them?
Michael:
Look, I think you need a budget pretty much right away and they'll get more sophisticated over time. But I think that this isn't something that... You should never have no budget.
Thomas:
And why is that?
Michael:
Sorry. As soon as you have a company, as soon as you're spending money. If you're just meeting people in coffee shops, working on an idea, I don't think you need a budget, but the reason you need one is that they're pretty critical to ensuring that you are tracking towards expectations. For example, if you're off track, you can start to reveal incorrect assumptions about your business, or business performance issues, or why things aren't working out, even if it's just on expenses, why are you spending more or less money than you thought you were? Is it because you're less busy? Is because you're more busy? Is it because you just were wrong? And so in that way a budget can be a check on the business and makes sure that things are going as expected, nothing is wrong. Separately as you start to add employees, well you always assume the best of people, it helps you understand that nobody's stealing or nothing's going wrong or you don't have some kind of hole that's unplugged in your business. And so I think budgets really make sure that everything's performing as expected.
Thomas:
And if you're a little bit off budget or things aren't on track as the initial plan, should you just course correct from that point or set up another budget?
Michael:
Yeah, I mean, I think that if you're within 20% or so, you should just understand the assumptions. If you start to be consistently more than 20% off, it's probably time to do a new budget, because there's no reason to, every single month look at something and say, Oh, well we're off because of this, but... Then it's time for something new. Right?
Thomas:
And who are the main stakeholders in budgeting and who should be keeping everyone on budget?
Michael:
So I'd say in the beginning it's just finance, which may just be one person or maybe the founder that's more operational. So it's whoever's doing the operations and I would keep it very, very limited in the beginning even if you're a 10 person company, starting to get all people tracking to a budget, it's a distraction. Besides this validating assumptions point, which is my main reason for a budget and an early stage company, nickel-and-diming on expenses is not really time well spent while you're trying to get a company off the ground and it becomes a big distraction. People start to confuse performance with tracking to a budget. If you hire someone to build a great product, their ability to maintain a SaaS budget at a 13 person company is really not relevant, so you don't want people distracted with budgets. I think you just want to keep that at a small group. I also think that really the only financial planning that you're doing at a small company is typically around fundraising. That's when you need to forecast. And typically the only people that are doing that are a couple people at the top of the company. It's a distraction as you're trying to get a company off the ground. All the way up through 100 to 200 people, you really don't need a lot of people involved in financial forecasting.
Thomas:
So with fundraising obviously comes growth like in investors, as senior company is growing, they inject more money into the business. How does budgeting progress with the businesses growth?
Michael:
Yeah. So look, I think in the beginning the zero to one is a little bit what I just mentioned, which is you start with sort of a small group of people, two to three, the lead person in finance founders. You start with monthly review and no accountability. This is just tracking to forecast, meaning you gave your investors some sense of how you thought you'll do, or you at least have some sense of how much money you're going to spend, et cetera. You agreed on that and now each month you're checking and tracking how did you perform to that. That gets back to the main purpose which is, are the assumptions about your business right? And so that's what you're doing in the beginning is just some form of, like I said, monthly review, no real accountability for people, just making sure that you just understanding how your business is doing and is it tracking the way you thought. Later in a company you'll start to introduce some form of quarterly planning and OKR setting. And there it starts to be who ever has OKR ownership at the company level, that person typically has a budget, so those would be group heads or hiring managers. Those people are going to be held to some form of budget. That budget may just be top line. It may be the number of people they hire. It may be something, but there's some sort of goal setting that's kind of wrapped into the budgeting process. Next step after that is once those people are doing some form of goal setting, they typically you add head count accountability to those people. Head count is usually the highest cost for most startups or tech companies, and so making sure that you're somewhat about at least how many people you need for a quarter will help put a gap, because the problem is if you don't do that planning at the margin, every new head count sounds good. And so you need to force yourself to think about what's reasonable. After you get there, starting around 200, 200 plus people, 300, 400 people, that's when you start to get into real budgets with templates and these are the expectations of SaaS per head count and this is how much coffee per employee we can have and this is how much we can give raises each year and all that kind of stuff. You don't need that in a small company. It's too much and it's a distraction. But I think that the only caveat I would say is one area where it is helpful to provide some guidance is, you always need to have some sort of policy around what is acceptable for people to spend on the company dime. So things like a travel policy, things like a understanding of what is acceptable for, call it office outings and team outings. Because if it's not consistent and there's no guidance, different people will interpret it in different ways and then you could have different sort of disparity with the company.
Thomas:
Let's say there's one particular team, in this case marketing. Marketing delivers under budget, meaning-
Michael:
Very, very rare.
Thomas:
Very rare
Michael:
Marketing is always overbudget.
Thomas:
They've achieved under CAC goals. They didn't fulfill all the head count that was budgeted in. Is being under budget a good thing?
Michael:
Not necessarily, I mean, not in this world. Right? I mean that's the thing is, I don't really get all in people's budgets as you know, because I think on CAC, customer acquisition costs, broadly being on delivering customers on a unit basis, meaning on a per customer basis being below budget is a good thing, but not if you miss your customer number. So the best thing to do would be delivering at budget or below budget with huge app performance, so you actually spend more total dollars, but the per customer is lower. But I think in general, as you're trying to get a company off the ground, you want guard rails in place to make sure things don't go crazy. But you shouldn't have most people optimizing margin and P&L in the beginnings of a company is really not time well spent.
Thomas:
And in that differential between what was actually spent and the budget, what do you do with that access? In past experience it's just been like, let's experiment with that money and actually reach the goal, or should that be put elsewhere and given to a different team that could use that budget in their goals?
Michael:
In a perfect world, especially in the marketing function, I think the best way you can set up acquisition oriented people for success and for longterm alignment with a company is to pay bonuses based on CAC, so people sort of get a piece of that back. A lot of companies don't do that. It's sort of a pain to set up, but I think that if you thought about marketing as a running a business, if they deliver under budget at the goal, then they get a piece of that money back as a bonus. I think that's an interesting concept. Or for every customer they deliver over the goal, under budget or at budget, they get some sort of bonus. That's I think the best way to align incentives.
Thomas:
And now, something a little bit more actionable. What does budgeting actually look like?
Michael:
Yeah, so I think budgeting is typically, in a small company start up, it's going to be a set of KPIs and an income statement or income statement line items that you expect and then how did you track to that? And so the expectation, the actual, the variance, the percentage variance and then why. So it could be customers, customer acquisition costs, it could be volume, all these sort of KPIs and then it's revenue, gross, cost of goods sold, all your expenses. What did you expect to do? What did you actually do? What was the dollar variance? What was the percentage variance and why did this happen? And I think that variance analysis is sort of the monthly budget review that you're doing. And like I said, it's not about nickel-and-diming your employees, it's not about nickel-and-diming your business. It's about making sure that things are performing as you expected. And if they aren't, why, what can you learn about your business if things are not expected. And it can be about your actual fundamental business or it can be about your operations, but both are very valuable.
Thomas:
What's been the biggest learning from budgeting and your experience in finance?
Michael:
I think the biggest learning for me is what I've just been preaching, that budgets can actually tell you something about your business, not the fact, it doesn't matter necessarily that it's happening, that you're above or below budget, but it's why are you, and it's a really good tool. It's almost like when you print something out and read it and you can just much more easily see errors then if it's on your screen. That's always a good thing to do. I don't know if you know about that trick, but if you really got something really important, you should print it out and read it. Make sure that it's error free. It's kind of like that. It's just, you remove yourself and you put yourself in a new paradigm. You look at your business in a different way and you start to say, Well, why is this happening? And so it's a tool to discover something unique about your business.
Thomas:
Great. Thank you so much. That's a wrap for startup budgets, Michael, until next time.
Michael:
Thank you.
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