In periods of rapid growth, startups face a financial balancing act: how to aggressively expand the business while keeping finances under control. For U.S. based startups across all growth phases, setting up a solid budget and sticking to it is essential to ensure that growth is sustainable rather than chaotic.
Exponentially increasing sales, quickly expanding headcount, and entry into new markets can quickly render a static annual budget obsolete. Traditional budgeting methods often fail to keep pace with such dynamic changes. Instead, companies need an agile approach to financial planning that adjusts as conditions evolve.
Forecasting for Future Growth
A realistic, strategic forecast is the starting point for any sound budget, particularly during times of rapid growth. Forecasting is not about forecasting perfectly; forecasting is preparing for the future. For a high-growth startup, revenue and expenses can change before anyone knew, so the founder should ideally model different scenarios and figure out what changes may need to be made to achieve those scenarios regularly to prepare them for uncertainty.
As a best practice, create not just one scenario but also different versions for different possible outcomes. Instead of creating plans based on a static single plan, create financial outcomes based on the best case, base case, and worst case and then figure out, using scenario modelling, how key drivers like sales volume, pricing, hire pace, or customer acquisition costs will impact your cash flow and margin.
Controlling Costs During Rapid Growth
Rapidly grown companies often have rapidly increasing costs. You will usually upsize your marketing campaigns, grow your headcount, and incur more variable product and infrastructure expenses all while revenues are ramping up. Without cost control or the ability to manage costs, a start up’s burn rate can dramatically increase which can really compromise your cash runway (i.e. how many months of operating cash you have on hand). Having proper budgetary discipline is an important process in staying on top of costs and incorporating cost management and control even while you are spending to grow. Financial discipline during expansion means you aren’t stifling growth, but are keeping a careful eye on expenditures and making sure every dollar is being spent wisely.
Here are several strategies to maintain cost discipline during high-growth phases:
- Monitor your burn rate and cash flow closely: Track your spending versus budget on a monthly, or even weekly, basis. Use dashboards or accounting software to get real-time visibility into where the money is going.
- Implement spending controls and accountability: Establish internal processes that enforce prudent spending as you grow.
- Plan for contingencies and build a buffer: High growth doesn’t eliminate risk – it often introduces new ones. Set aside a portion of your budget as a contingency reserve for unexpected costs or downturns.
- Leverage tools to automate expense management: As your startup expands, manual expense tracking with spreadsheets may become too slow or error-prone. Consider using financial management software or expense tracking tools to automate and streamline cost control.
- Prioritize essential spending with ROI in mind: During rapid expansion, ensure that the bulk of your expenditures are directed toward areas that drive growth or revenue. Investments in product development, sales, and customer acquisition typically fuel growth, whereas “nice-to-have” expenses can be minimized or deferred.
Adjusting Your Budget as You Scale
As a startup grows, the budgeting process needs to develop as well. A plan that made sense as a 10-person startup, probably won’t do so for your 100-person startup in 5 different markets. To adjust your budget for scale, you need to constantly check in and align it with where you currently are in your business reality, your stage of growth and your strategic priorities.
You can plan to do your formal budget check-ins more regularly and more often, as needed, once you scale. For example, instead of doing a budget once a year and forget about it, growth-based startups are better off with regular check-ins and budget revisions.
Setting Financial Guardrails
At a growing startup, leadership can’t micromanage every line item, but leaving spending unchecked in a world full of opportunities (and expenses) is justified dangerous. What do you do? Make financial guardrails – high-level rules or limits that ensure you keep your company’s spending within safe bounds, but allow teams the freedom to operate and innovate. You can think of guardrails like lane markers on the highway – they are not meant to dictate exactly how we drive (other than not veering off the side of the road).
Some examples of financial guardrails for a scaling startup include:
- Unit economics thresholds: Set minimum acceptable metrics for unit economics, such as gross margin or customer acquisition efficiency.
- Spending and approval limits: Define clear limits on spending authority and budget caps for certain categories.
- Runway and liquidity requirements: Maintain guardrails around cash reserves and runway to ensure the company always has a financial safety net. A common rule of thumb is to keep enough cash on hand to cover a minimum number of months of operating expenses (e.g. 6, 9, or 12 months of runway at all times).
- Profitability and efficiency targets: As you scale, you might introduce guardrails related to profitability or efficiency to keep growth on a healthy trajectory.
Leveraging Outsourced Financial Expertise for Budget Discipline
For many startups, especially those experiencing their first surge of growth, establishing and enforcing these budgeting best practices can be challenging. Early-stage companies might not yet have a full-time Chief Financial Officer (CFO) or an in-house finance team with the experience to build complex financial models and controls. This is where outsourced financial service providers can play a pivotal role, by offering on-demand expertise to guide the company’s financial strategy and operations. Engaging an outsourced CFO service (such as ERB) allows startups to benefit from seasoned financial leadership on a flexible, cost-effective basis.
Expert CFO guidance: An outsourced CFO brings a wealth of knowledge from working with multiple companies and navigating growth challenges before.
Financial modeling and budgeting setup: ERB can assist in creating robust financial models and budgets from the ground up.
Expense management and cost control: Outsourced financial teams also help implement day-to-day expense management and cost control measures.
Maintaining budget discipline and accountability: One of the greatest benefits of having an outsourced CFO or controller is the constant reinforcement of budget discipline. Startups are hectic by nature, and founders wear many hats; amid product development and scaling operations, financial monitoring can slip through the cracks. An outsourced CFO provides that dedicated attention to the numbers. They will hold regular financial reviews (monthly, for instance) to discuss variances from the budget and the reasons behind them.
Conclusion
Rapid expansion is an ideal state for most new businesses, but the ability to properly manage that growth is what leads to success, or more fleeting successes. Budgeting may not be the most glamorous part of scaling a company, but it is the cement on which the accolades of a startup – breakthrough products, new customers, and gulf expansion – become part of a sustainable business strategy.
Smart forecasting, expense limitations, changing financial plans to adapt to evolving circumstances, and holding yourself to a well-understood set of financial guards, creates a good opportunity to grow in a contained way that provides reasonable expectations for success.
There is an inherent level of financial discipline that shapes the best kind of scaling: you won’t expand while compounding mistakes or damaging the health of the company. You will expand on solid financial foundations.
If you want the ability to scale consistently, you need to have the systems in place and the mindset to stick to a budget. This means creating a culture where everyone has some level of shared responsibility to the fiscal wellbeing of the company.
Finally, with the understanding that this is not an easy fiscal journey, the good news is you don’t have to sail far on this complicated sea of finance alone. The support provided by experienced financial professionals, like the outsourced CFO services at ERB, significantly improve your chances of budgeting and investing wisely at such a fast pace as you grow.