Your Startup Does Not Need A Budget
Get a better growth outcome with strategic initiatives + financial guardrails instead
At Abacus & Pencil, I focus on helping startups define their Growth Strategy, align their Operating Priorities, and Raise Their Next Round as they scale to $100M in ARR and beyond. Whether you’re simply looking for a quick gut-check or are interested in exploring a project together you’re welcome to grab time on my calendar.
When someone says “We need a budget” you’re probably visualizing a big spreadsheet that includes:
An ARR Goal that might or might not map to the roll-up sales quota,
Some assumptions about how that ARR converts into GAAP Revenue and Cash,
Detailed list of headcount, by team and by month with roles and new hires listed and greenlit one by one,
A list of all your vendors, how much you spent on them last year, and how much you can afford to spend next year,
A three-statement model with your balance sheet and cash flow (which most non-finance people don’t know how to read anyway).
The challenge is that most annual budgets suffer from 1 of 3 fatal flaws.
The budget is performative (typical in Series A/B)
Despite the title of this post, every startup is contractually required to have a budget. After all, it’s part of your investor rights agreement and/or any bank debt agreement.
No budget = no VC investment.
Where this becomes a problem is when this investor/lender requirement is the primary reason you’re building a budget every year.
What this looks like in practice:
CEO sets top-down targets, tells finance to come up with some numbers.
Board gives feedback, CEO tells finance to “make it work” in the budget.
Finance goes around and asks for inputs, nobody expects to be held to those inputs later.
You build the budget and ship it just in time for your reporting deadline of January 30th.
Nobody looks at the budget to see how you’re doing against it, except for the week before the board meeting; finance comes up with some “explanation” for why you’re above/below budget.
By the time summer rolls around you’re so far off on the budget that it becomes meaningless; you continue to report on it but bury it in the appendix of your board deck
TL;DR: the budget is a waste of precious resources and a distraction for management.
The budget is restrictive (common for Series B/C)
At this stage, you’ve probably already hired an experienced Head of / VP Finance; maybe you even hired a CFO. They have taken the time to educate the company on why budgets are important:
Accountability: set clear goals and hold ourselves accountable to hitting them; measure and track our ability to forecast and course-correct the business.
Execution: invest time up front to align on what we’re funding, so that as we get into the year teams can focus on execution.
Risk: create checks and balances to manage burn; make sure budget owners have clear guardrails that they can stay within.
Fundraising: anticipate the next fundraise by forecasting the company’s cash needs and setting goals around KPIs that investors are looking for.
Notably absent from this 👆 list is Growth. And that’s how many budgets go from being value-additive in theory to being value-destructive in practice.
Here’s a common way this shows up: a burn / growth downward spiral with repeat layoff cycles. An example that I’ve seen first-hand:
The burn number in the draft budget was adding up higher than what the board wanted to see.
In response, the company raised its growth target above what was supported based on the bottom-up forecast and sales and marketing headcount investment.
Unsurprisingly, the company started missing its growth goals. A quarter later the CFO mandated cost cuts so that the company could at least hit its burn target.
But with sales and marketing being spread so thin, this was now further undermining the growth trajectory and risking starting a downward spiral.
TL;DR: the budget forces the company to make bad decisions and limits the ability to respond to evolving market needs.
The budget is manipulative (often in Series C/D)
Even with the best intentions, good budgets can be used to justify bad decisions.
The example below was frankly my fault 🙂:
The company was focused on annual growth and burn targets.
The finance team wanted to:
Come across as being growth-oriented and not restrictive (mindful of the example above).
Create some incentive for the Eng. team to invest time into the oh-so-not-sexy project of optimizing cloud spend (which Engineer would be excited to be tasked with deleting old files?) by ‘rewarding’ them with headcount based on those savings.
As a result, executives were given the ability to reallocate OpEx within their teams as long as they hit the growth and burn targets.
Where all of this ran into trouble was when budget owners started:
Using savings from their well-padded vendor budgets to fund headcount: shifting one-time costs into semi-permanent expense commitments.
Using savings in their Q1 budget to fund headcount in Q4: without controls that accounted for the fact that hiring one less person in Q1 saves you $200K for the year, which in turn funds four (!) people in Q4 (you only incur 3 months of salary in the current fiscal year).
As a result, the company went into the subsequent year with virtually all of its headcount capacity pre-committed. Leaders had to scramble to move people around and weren’t able to get the right roles funded to support the subsequent year’s strategic initiatives.
A situation I often run into is when teams are just “dumping” assumptions into Q3/Q4 to make the year as a whole look good. Some examples I’ve seen:
Going into the year with a revenue goal that’s lower than your bottom-up forecast; then using that surplus to fund a pet project that wouldn’t have been funded if it had to go through the scrutiny of the annual planning process.
Sandbagging the revenue goal early in the year to gain some credibility and goodwill. Knowing that this credibility can be “cashed in” when we inevitably blame “market conditions” for missing the back half of the year.
Assuming an operationally unreasonable improvement in marketing efficiency for Q4 because “it is the holidays and everyone will be shopping” and hoping that everyone will forget about it by the time Q4 rolls around.
TL;DR: the budget isn’t there to enable better decisions but to make pre-existing decisions look good.
When I think about the most successful budgets annual financial plans I have built there are 6 shared traits.
Aligned up-front on guardrails for topline and bottom line, then picked one more KPI that we prioritized for the year (e.g. NDR, GM %, ACV, etc.)
Built a detailed bottom-up view (e.g. list of greenlit headcount) of what it took to get us a fast start in Q1, had a hypothesis for Q2, and had some triangulated assumptions that we sanity-checked for Q3/Q4.
Obsessed about getting an accurate bottoms-up revenue forecast, set the first half of the year ARR goals in line with that forecast and second half goals slightly above that forecast: this created pressure in the system but bought us time to figure out what was working.
Reinvested the time savings from not having to build a detailed bottoms-up budget into identifying and fleshing out strategic initiatives that would help close the gap between the bottom-up ARR forecast and the goals in Q3/Q4.
Publicly committed (and had a track record) to doing a lightweight re-budgeting midway through the year. We’d approve or pull back headcount at that point based on (a) revised ARR forecast (b) initiatives that were going better vs. worse than expected (c) strategic hires that needed to be in place for the subsequent year’s fast start.
Did not spend a lot of time doing budget/variance with individual teams every month. Instead, we discussed holistic performance against budget as a leadership team. Check-ins with individual teams were less focused on figuring out where they were over/under and more focused on reviewing, capturing, and validating their forecasted needs for the subsequent quarter.
As you start thinking about 2025, instead of building a detailed budget consider developing this instead:
A list of strategic initiatives with clear operational milestones
A light-weight financial model that maps to those milestones
An investment narrative that helps align the two items above
Yes to all of this! The process of making the Financial plan for series A/B can be a strategic conversation that drives alignment on initiatives and sets up a framework so you will notice quickly when things are/are not working. It can also be a complete waste of time is never referenced again.