As discussed in the previous article, “reporting” for life science start-ups encompasses both financial and non-financial information for a variety of stakeholders. In part 2, I had promised to cover both budgeting as well as some basic internal controls. As it turns out, this article will only discuss budgeting as both are important topics and are deserving of their own attention, so, there will be a part 3. Again, this advice is aimed seed funded lean start-up with a small team of founders, but, the concepts are still applicable to larger, series A funded start-ups.
The most relevant financial metric for any start-up is cash, and the budgeting process is intended to (i) plan for future spending, (ii) analyze actual spending, (iii) identify variances, and (iv) anticipate the timing and amount of future financing (series or tranches). The starting point for any budget should be the business plan used to arrive at the term sheet.
Suppose investors in a therapeutics start-up might agree to invest $1,000,000 with the purpose of doing preclinical tests on a lead compound in order to file an IND and attract a series A investment. Assuming the start-up (and investors) have done their homework, that $1,000,000 will be stratified based on use of proceeds (i.e. salaries, lab space, materials, consulting fees, etc.) and substantiated by quotes or researched estimates. All start-ups seeking funding prepare a long-term financial projections illustrating their prospects in five to ten years, but, in the seed stage, a use of proceeds budget is just as critical.
From this high-level budget, the company should prepare a “starting budget” over the life of the seed round. A well prepared budget appears is done as follows:
- Although there are a myriad of budgeting applications and software programs available, a spreadsheet is the least expensive and easiest option.
- The budget should be done on a monthly basis, as most expenses occur or are billed monthly (i.e. rent, consultants, lab service providers, etc.). Some people like to include a column for cumulative project to date (PTD) expenses for each month.
- Expenses should be categorized by groups and/or subgroups, such as Lab and Research Costs, Corporate and Administrative, and Regulatory and Reimbursement, and Intellectual Property and Legal. For example, under Lab and Research Costs, you might have a individual expenses for reagents, preclinical samples, consumables or scientific consulting payments. In terms of granularity, the goal is to be sufficiently specific so that you can easily spot variances when comparing to actual results, but not overly specific such that you are scanning hundreds of items. Typically, 25-30 individual expenses grouped into four or five main categories is ideal. Also, the expense hierarchy used to prepare your budget should match that used to record invoices and expenses.
- For each month, there should be a reconciliation between opening and ending cash, in that Opening Cash – Expenses + ∆ Accounts Payable = Ending Cash. Unless there is a significant time difference between the time the start-up expects to incur expenses and pay them, such as the case of an ongoing payment arrangement with a law firm, the change in accounts payable can be ignored.
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The “starting budget” forms the basis of the “rolling budget”, which is used to compare actual results on a monthly basis and investigate variances. The procedure for preparing a “rolling budget” is a follows:
- Within ten business days of month end, the start-up should have all of its invoices recorded for the month, and an export of results. Ten days is a sufficient window for invoices to arrive, but ensures reporting is done on a timely basis.
- Invoices should be recorded as an expenses as at the invoice date. Although this is not compliant with the accrual basis of accounting, it is permissible in this instance as budgeting and reporting is based on cash.
- The export of results should be compared to the monthly budget on a line-by-line basis, and the difference calculated in a column called “Monthly Variance.” A variance may be favorable or unfavorable, and there are two types of variances. A timing variance, and results when an expenditure happens in a month other than initially expected, such as a customized reagent that is delayed shipment for several weeks due to quality control issues with the vendor.
A timing variance will always reverse in a subsequent period, resulting in no net effect. A permanent variance results from unanticipated over and under-spending, and does not reverse. If the customized reagent supplier provides a significant discount to compensate for the delay, this would be consider a favorable permanent variance.
- Reporting is only valuable to the extent that it informs decision-making, so materials variances should be investigated on a monthly basis. Specific attention should be given to permanent unfavorable variances, as these contribute to a faster burn rate and shorter runway. Variances should also be considered in the context of milestones. A start-up that is on budget but not progressing as expected is in the same position as one that is over-spending but meeting its targets.
- Once results for the month have been analyzed, budgets for subsequent months should be adjusted to reflect changes in expectations (hence the term “rolling budget”). Again, emphasis should be placed on the company’s updated burn rate and runway to determine if investors need to be informed about raising additional funds or releasing a tranche earlier than expected.
Without a sample spreadsheet, it might be difficult for some people to visualize the budgeting process (and if readers would like to see one, please feel free to mention that in the comments.) But the appearance or method of preparation is secondary. Ultimately, it is most important that a start-up that adheres to the four budget principles mentioned above.
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The competition is rough, and you’re bound to get a lot of applicants.The trick to finding the best candidates lies in selling yourself to the right audience.
And to help you reach that job-posting sweet spot, we’re sharing a few tips in this article.Observe Your CompetitorsTake a look at the way your peers and competitors are writing up their ads.
What kind of call to action phrases are they using?Lastly, observe their overall brand appeal and impression with people.
Most successful companies focus on the following:Being direct - try to avoid renaming the titles into something witty, like “programming wizard”, as it’s usually perceived as unprofessional;Precision - which software they should be familiar with, collaborative platforms, what skills they need, seniority level, etc;Avoid overused phrases - anyone can offer a “constantly growing, dynamic environment”.
It makes the impression of your company using a stock template for job descriptions.Avoid gatekeeping - as important as it is to write precise requirements, you also can’t look like you’re asking for a marketing prodigy.
Post news on conferences and lectures your employees will attend (or already have) on your company’s website or social media page.This gives you enough exposure to potential new employees.
There are many financial reporting services for startups that can be outsourced.
When a small business decides to outsource its accounting, they usually find that professional assistance is available at a very affordable price.
Because all of the duties of the accountant are performed by an outsourced professional, the company is able to focus on developing new products and generating new revenue and can eliminate the need for a full-time accountant.
Wide Range of Expertise One of the advantages of using outside service providers for financial reporting is that they have a wide range of expertise that they can bring to bear on the financial reporting work that is required for startups.
The key services providers provide these services include financial consultancies that help startups establish the structure of their initial business plan and provide support for financial reporting as it becomes necessary.
These are essential services for a startup that is still trying to get established and struggling with financial management issues.
