Budget: First Half, Second Half

If you are the CEO of a VC or angel backed company, will need to raise more money in the future, are doing more than $100,000 of revenue a month, and are growing more than 25% a year, then this post if for you.

In January, you finalized your budget. Unless something went horribly wrong, you made your plan in January, especially if the plan was finalized in February. Assuming things were on track, you made March and declared victory on Q1.

Q1 is the easiest quarter to make. If you miss your Q1, regardless of the type of revenue you have, you aren’t going to make your revenue plan for the year because your budget process isn’t accurate. If you are a SaaS or consulting business, you likely just can’t make up what you missed, especially if your growth rate is greater than 50% for the year. If you sell a physical product, you have a lot of Q4 upside and unpredictability, but now you have to manage your cash to get to Q4 so that you can invest in building inventory to over-perform. If you are a marketplace, you’ve likely got a supply/demand imbalance that you don’t completely understand. And, if you overperformed on sales but can’t implement things fast enough to recognize revenue, you’ve got an entirely different, and especially difficult problem to overcome.

If you aren’t going to make your revenue plan, it’s unlikely you’ll make your EBITDA or Net Income plan. You don’t even have to get complicated and look at Gross Margin or more derivative metrics – if you are off in Q1 and have any sort of growth expectations , you are going to miss for the year.

But, if you are like most CEOs, you think you’ll fix things in Q2 and be close enough to or at plan to keep going on your current budget. And, if you met or beat Q1, you’ll be somewhere between appropriately confident and overconfident about Q2.

It’s June 7th. You likely know how you are going to do in Q2 by now. Every now and then I run across a business that doesn’t have a handle on their first half of the year by the beginning of June, but if you are honest with yourself today, you know whether you will be ahead of, at, or behind plan at the end of Q2.

If you are going to be more than 2.5% behind plan on your revenue line for the first half of 2016, it’s time to rebudget for the second half of the year. If you missed your EBITDA by more than 5%, it’s time to rebudget for the second half of the year. If your GM% is off by more than 5% for the first half, it’s time to rebudget for the second half.

When I say rebudget, I don’t mean “reforecast.” I don’t mean have three numbers – original plan, new plan, actuals. I mean start now, before June is over, and create a 2H16 budget. Throw away your current budget for 2H16 – it’s wrong. Don’t wait until July to realize that it’s wrong. Own that it is wrong right now and come up with a new plan for the rest of the year.

Deal with reality. Your growth rate will be slower than you planned at the beginning of the year. No matter what you do at this point, your EBITDA loss and the amount of cash you will consume over the year will be greater than the original budget. You will have an uncomfortable board meeting in your future. But it won’t be nearly as uncomfortable if you keep waiting to deal with reality.

This is especially true if you have a growth rate of > 100% planned for the year. The smart CEO has already reduced her hiring plan but in an informal way. By creating an entirely new budget for 2H16, you make it official. You also make it clear to everyone, including your team, your board, and your investors where you really are at and where you are planning to go.


Also published on Medium.

  • This is exactly why it’s important to be transparent with investors and in the process of doing diligence, making sure they are a part of your team. This doesn’t mean they can’t be critical-but it does mean they should offer constructive criticism and help when things don’t go as planned.

    I’d also keep conversations open with other investors, because instead of doing a huge up round, the business might need to do an inside round, flat round-or a small up round (depending) to get money into it so it can keep going.

    One real key is how you communicate this to existing employees. You need to do it in a way that rallies them, not depresses them

  • Eddie Wharton

    Reminds of this AVC post: http://avc.com/2016/04/dont-kick-the-can-down-the-road/

    Putting off difficult, but inevitable decisions always seems to make things worse.

  • BradCouper

    Agreed.

    We do annual forecast but a rolling quarterly budget.

    The minute a budget is ‘finished’ it is out of date especially when based on assumptions.

    A quarterly budget allows for constant adjustment based on the reality of the situation.

  • Frank Traylor

    It’s the perfect time for a CEO to show what she’s made of and investors to learn more about who is running the company. It’s the chance to admit you were wrong, investigate assumptions that led to incorrect conclusions, and form a new outlook with numbers attached. That or a chance to go on the defense; that you were right about everything foreseeable and were blindsided by the unknowable.

    It’s a time when humility or hubris appears.

  • TeddyBeingTeddy

    How much rope do you give a CEO that misses budget after budget?

    Everyone says they knew and should’ve fired them sooner, in hindsight. Easier said than done. So where does Brad draw the line and make the CEO actually accountable?

    • It varies a lot – I don’t think there is an absolute answer. And while all VCs say “I know I should have fired the CEO earlier”, they didn’t, so that line is just a throwaway, a rationalization, or self-reflection (vs. justification).

      • TeddyBeingTeddy

        Much respect, thank you