Budget forecasting is one of the biggest challenges for startup businesses. Many of the tools and rules of thumb used by established businesses just don’t work when you are planning rapid growth.
But that’s not an excuse to simply pull a number out of your hat, cross your fingers and hope for the best. For startup businesses with no history to go on, one of the simplest techniques to establish a preliminary marketing budget is something called the payout plan.
Using this technique, you project what your sales volume will be three years from now. You then build your marketing budget around the company you expect to be. Working with your accountant, you can carry forward the expenses so they match more closely with future sales, reducing your tax burden. (Note – I am not an accountant. You need to confirm the details of this accounting up front.)
The advantage to this method is that your marketing budget is not limited by your current sales. For startup companies with plans for rapid growth, marketing investments may be the missing link between where they are and where they want to be.
Companies like Amazon and Monster.com employed this type of technique. In the early days of their existence, they knew awareness was the key to growth. Long before they had adequate sales, they invested in television advertising, spending at a level far in excess of their size at the time. The plan succeeded and the sales came. It worked because they had done their homework, and figured out what they needed to do to grow and how their marketing fit in to their overall plan.
This technique is not for every business. If awareness is not your primary issue, no amount of spending will grow your sales. Consider the case of Pets.com. Like Amazon, they bought ads on the Super Bowl. But the business failed. Why? Awareness wasn’t their major obstacle to growth. Even when people knew about them, they chose not to use the product. There were major holes in their business model, and no amount of advertising could fix that.
Is the payout plan right for you? It’s not without risk, and since you invest based on future sales, it will be several years before you figure out if you were right or wrong. But if you can live with the uncertainty, it can be a great strategy if:
- Lack of awareness among your target audience is the primary obstacle to your growth
- You have addressed the capacity issues you will face if your growth accelerates rapidly
- You are able to secure a loan or investment to prepay for additional marketing in advance of sales
- You are committed to the long haul. Your income statement won’t look very attractive for the first few years; this is a plan that pays out over time
Looking to put some of these ideas in to action ? Download our free budget calendar worksheet.