CASE

STUDY
How to Budget a Startup Business

Contents

Brief Intro.......................................................................................................................... 1
Opening Discussion........................................................................................................... 1
Presentation...................................................................................................................... 4
Group Exercise.................................................................................................................. 5
Closing Discussion............................................................................................................. 6

Brief Intro Tips for the

volunteer
The purpose of the case study is to present
the fundamentals of budgeting and budget Review the case study before class. To better
communicate with the students, try to
types. Students investigate the main steps
remember:
and actors in the budgeting process. Students
begin to analyse the role of budgeting in the → What were your interests in high school?
management of a company. The case study is → How did you communicate with your
divided into four sections. The first two (opening friends, your teachers and parents?
discussion with definitions and presentation) → Who was your favourite teacher, who
are presented by the volunteer. The second part served as a role model for you? Why?
contains data that will be used by the students
for the calculations in the group exercise.
By the end of the module students will be able to:
→ Differentiate between a government budget, a household budget and a company budget.
→ Distinguish between budgeting and reporting.
→ Explain the functions of budgeting.
→ Outline the main steps and actors in the budgeting process.
→ Identify different types of company budgets.

→ Use budgeting in planning their social business concept.

Opening Discussion (15 minutes)

The section introduces basic definitions through
a discussion. Possible questions to encourage it
might be:
1. Do you plan your income and expenses?
What about your family?
2. How do you think a company manages its
finances?
3. Do you think a company should plan their finances?
4. Do you know how the process of planning and controlling the finances is called?
In class, briefly introduce yourself (education,
experience, position in NN) and share a few
words about the Social Innovation Relay and
NN. Encourage the students with questions to
determine the extent of their knowledge and
build upon it.

1
 ● Fixed costs
Expenses that are independent of the scale of
production. The costs paid by the company does
not change with an increase or decrease in the
amount of goods or services produced. The
entrepreneur has to pay these costs even if there
are no activities.
● Variable costs
Expenses that are dependent of the scale of
the business activities. The costs change in
accordance with the variance of the production
volume. They rise when the production increases
and fall when it decreases.
● Revenue
The amount of money that a company receives
through its activities for a specific period of time.
The most significant role in the revenue plays
the income from selling goods and services. It
could be calculated by multiplying the unit price
and the number of units sold.
● Break-even analysis
Analysis showing the point at which the total
cost (the sum of the fixed and variable costs)
equals the total revenue. At this point there is
neither profit nor loss. It shows the sales amount
(in units or revenue) required to cover all costs.
● Budget
A quantified plan of expectations for a certain
period of time. It is widely used for planning
income and expenses but it also serves for
planning quantity of units in numbers or natural
measures such as llitre/gallon or kilogram/pound
(e.g. in the sales budget).
2
Explain what fixed costs are. Provide examples
such as rent and accommodation, salaries of
support functions (e.g. Finance, HR) interest,
insurance, lease, property taxes, security,
licences, etc.
Explain that there is another type of costs
– variable costs. Provide examples such as
raw materials, direct labour, packaging,
commissions, etc. Explain that the success of
the business is not determined only by the costs
but also by the revenues.
Clarify the difference between capital and
revenue. Explain that an important part in
planning the costs and the revenue is the break-
even analysis.
Explain that the break-even analysis is important
for budgeting (especially for the budgeting
of sales revenue). Focus on explaining what a
budget is and what the stages of the budgeting
process are.
Emphasize that every participant (government,
households, companies) in the circular flow of
money plans their finances through budgeting.
But the government and the household budgets
include only expenditures and revenue in a
single master budget.
The budget is a tool used by the management
for decision making purposes, for implementing
and controlling the strategy. It translates the
business model and the strategy in numbers
and vice versa. The budget is always based on
assumptions and estimates.
● Budgeting process
(an exercise in blended format is provided)
Explain that the analysis of the expenses and
the income is the most important part in the
budgeting process. Emphasize that every
business is obligated by the law to report its
financial results. Reporting is done for the past,
whereas budgeting – for the future. While
reports provide information for external users,
the budgets are used within the company.

Developing a budget is a long and time consuming

process that requires a lot of thinking. But it is Goals
very important for each company no matter it
ew
is a big one with a long history such as NN or a

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Re
startup aimed at implementing social innovations.

Pro
Budgeting is teamwork and every single employee

jecti
may participate in the process together with the Budgeting

ons
managers.
Process
ing
nitor
It consists of several main stages:
Mo

1. Gathering data and setting the goals during

Bu
strategy sessions.

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ge
t
io
2. Making realistic projections of potential sales Presentat
based on the sales and marketing strategy. It
is based on the market analysis, and takes into
account product benefits, needs/preferences of the prospects, competitor’s activities, and
impact of other micro and macro environment factors.
3. Developing the budget through discussion on the goals, costs, benefits and the strategy
with the finance department, who makes consolidation and compilation of the numbers.
4. Presenting the budget in front of the stakeholders and the investors.
5. Monitoring outcomes.
6. Reviewing and adjusting the budget based on goals and expectations.

3
Presentation (5 minutes)

The section is aimed at presenting an example of basic information required for budgeting in a
startup. The information will be used in the next section.
Mary is a social entrepreneur who is running a startup1. She and her team have developed high-
tech glasses with safety and navigation features for visually impaired people. Mary contacted a
local technology company to produce the glasses. So far, she has concluded an agreement with a
carrier for national deliveries at a flat cost.
Review the information in the tables below.
The finance team provided information about all costs.

Expenses Cost
Rent per month € 500
Production per unit (raw materials, direct labor) € 95
Marketing (subscriptions for platforms and software) per month € 300
Packaging per unit €1
Shipping per unit €2
Commission paid to the Internet platform per unit sale €2
Subscription for legal and accountancy services per month € 400
Bills (Internet, electricity and mobile carrier) per month € 200

The marketing team conducted desk research. According to statistical data from the World Health
Organisation2 in 2010 in Europe there were:
● 2,550,000 blind people and
● 23,800,000 low vision people, giving a total of
● 26,350,000 visually impaired individuals
Mary is still negotiating international shipping. Therefore, she will be able to target only the local
market – about 200 000 visually impaired people in her region.

Visually impaired people 200 000

Price € 200

The whole team discussed the data and set the following goals for the quarter.

Projections
Month
Audience reached Sales conversion rate
October 0.5% 1%
November 1% 2%
December 2% 3%

1
The example is based on the idea of the international winner in SIR 2016 – team Oculus from Romania.
2
This information and further data is available on the WHO website.

4
Group exercises (15 minutes)

The section develops basic skills for budgeting revenue, expenditures and break-even analysis.

1) Help Mary’s team prepare a Sales Budget (4 minutes)

Sales Budget Start with the calculation in units. (2 minutes)
Month Units Revenue 0.5% x 200 000 = 1 000; 1% x 1 000 = 10
October 10 € 2 000 1% x 200 000 = 2 000; 2% x 2 000 = 40
2% x 200 000 = 4 000; 3% x 4 000 = 120
November 40 € 8 000
December 120 € 24 000 Fill in the budget. (2 minutes)

2) Help Mary’s team determine whether her team Start with grouping the expenses into fixed and
will reach the break-even point in the first month. variable); (2 minutes)
(6 minutes) (exercise in blended format is provided)

Fixed Cost Variable Cost Calculate the margin contribution. (2 minutes)

Rent € 500 Production € 95 Explain that the contribution margin shows what
Marketing € 300 Packaging €1 part of the income goes to cover the fixed costs.
Price – Variable Cost = Contribution Margin
Subscription € 400 Shipping €2 € 200 - € 100 = € 100
Bills € 200 Commission €2 Calculate the break-even point (2 minutes)
Total € 1200 € 100 € 1200 / € 100 = 12 units
12 units x € 200 = € 2 400
The expected revenue for the first month accord-
ing to the sales budget is € 2 000. Therefore,
Mary will not break-even in the first month.

3) Help Mary’s team develop a Budget for Use the values calculated in the Sales Budget.
revenues and expenditures. When will the break- Underline that the information in all of the
even point be reached? (5 minutes) budgets is connected. The Marketing and Sales
Department plays an important role in the
Month Revenues Expenditures budgeting process. (1 minute)
October € 2 000 Calculate the expenditures and fill in the budget.
November € 8 000 (3 minutes)
December € 24 000 Use the information in the sales budget to
calculate the sum of the variable costs.
October: € 1200 + 10 x €100 = € 2 200
Month Revenues Expenditures November: € 1200 + 40 x €100 = € 5 200
October € 2 000 € 2 000 December: € 1200 + 120 x €100 = € 13 400
November € 8 000 € 5 200 Explain that the break-even will be reached in
December € 24 000 € 13 400 November. (1 minute)
(exercise in blended format is provided)

5
Closing Discussion (10 minutes)

The section is aimed at summarizing the most

important information and underlining the
conclusions. The volunteer should encourage the
students to think and reflect on what they have learnt.
Use the following questions and provide the answers
if necessary:

● Do you need a budget in a social enterprise, which is just starting its activities?
Without goals set in the budget, the company cannot measure whether it is achieving them, whether
it is successful and achieving its strategy. The budget represents a business model in numbers. The
process of budgeting is dependent on the size of the company but a startup might use simpler model.
The startup should develop budgets for different scenarios and frequently adjust the plan to the
changes in internal factors and in the market during the year.
● Who is involved in the budgeting process?
Everyone might be involved because it is teamwork. Input is required from all functions of the
company. The role of the finance department is to support and challenge the managers in order to
identify what impact a certain marketing/sales/ other activity would have on the sales and profit.
● What period is the budget developed for?
Usually, budgets are developed for a year but they are also part of the long-term strategy, e.g.
budgets for 3 or 5 years are also prepared, based on the projections. However, they could be static
or flexible. Startups should use flexible budgets and review their targets on a regular basis. In the big
companies like NN the budgeting process takes about half a year.
● What education and skills are required to develop a budget?
Education in finance and accounting will be useful but it is not a must. However, developing a budget
requires analytical thinking and support from a finance professional is highly recommended. In
addition, presentation skills are required to convince the managers and other stakeholders that a
budget is realistic. Knowledge on the market and economic environment is also required, since a
budget is always based on what the company could actually achieve in the market.
● How to minimize the deviations in a budget?
The assumptions in the budget should be realistic. The budget should be monitored and actual
numbers should be compared with the planned. Thus, the budget monitoring is an early warning
system. In addition, it is a management tool for control and decision making. Therefore, deviations
are not necessarily indicators for failures in budgeting. Rather, they help the management identify the
factors that influence the company performance and send an early warning for remediation actions.

Follow-up activity

After the first month Mary’s team monitored

their progress comparing the actual results To cope with the new situation, they should
revise the budget and discuss what possible
with the ones included in the budget. The
measures should be taken.
sales are 20% lower. What would you advise
Mary? Help her revise the budgets.

The case study is developed by a team of NN Bulgaria and JA Bulgaria3.

3
NN Bulgaria: Marilena Angeleanu, CFO; Krasimir Marinov, Head of Marketing.
JA Bulgaria: James Jolovski, Financial Literacy Program Manager; Magdanela Delinesheva, School Programs Director.