Launching a tech startup is an exciting venture—not an easy one, though. Yet, according to 2023 statistics, 15,200 startups are founded per year in Europe.
After reading this article, you'll manage your startup's financials with sophistication.
What does the startup landscape in Europe look like in 2024?
Why is budgeting important for success?
What should your startup budget plan include?
How do I calculate my budget?
What if I need to lower my budget?
Why should I include branding and website costs in my startup budget?
Are startup costs tax deductible?
Also, learn how much money you should put aside to secure success in our free Startup Key Expenses guide.
Startup success & failure in Europe
Over the past decade, Europe has seen a remarkable rise in tech startups, creating the largest ecosystem of tech companies in the region’s history.
The probability of scaling to a billion-dollar valuation is the same in Europe as in the US.
128 European startups have achieved Unicorn status. Nearly 4,000 growth-stage tech companies are on track to become the next wave of European success stories, with projections suggesting that the number of these promising startups could double within the next five years.
However, 90% of startups fail. While no one can deny the importance of timing, product-market fit, and a bit of luck, one vital factor is budget planning. Research from CB Insights shows that 38% of startups fail due to a lack of funding or running out of capital, while 15% fail because of pricing or cost issues. Common warning signs of cash flow problems include low profit margins, high payroll costs, limited repeat purchases, delayed client payments, and high churn rates.
Having a clear understanding of your costs from the start significantly increases the likelihood that your startup will not only survive but also grow.
Why is budgeting important for startup success?
Essential for long-term sustainability, budgeting is crucial for startup success. It helps manage resources effectively, ensures cash flow stability, and allows founders to anticipate financial needs, make informed decisions, and avoid overspending. It will help you:
- Determine when and how many employees you should hire.
- Estimate your break-even point and adjust variables accordingly.
- Predict cash shortfalls and funding needs.
- Pinpoint extra cash to build your startup's emergency fund.
- Generate accurate financial projections to share with investors and stakeholders.
What should your startup budget plan include?
Key expenses for your early-stage startup
Most of all, focus on legal and administrative costs, branding & marketing, technology & software, employees, operational costs, R&D costs. Also, leave room for additional costs and set money aside for unexpected expenses. Get a detailed outline of how much you should plan for each of these factors in our Guide on Startup Costs.
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Timeline
Organize your expenses into one-time expenses and monthly expenses. Permits, licences, fees, and brand and website creation are generally considered one-time expenses. Salaries, software, and external services for accounting or R&D should be included in your monthly finance planning.
You should aim to cover at least one year’s worth of monthly expenses, though planning for five years is even better for long-term security. Add up your one-time startup costs along with your monthly operating expenses to get a clear idea of how much capital you'll need and when you'll need it.
Revenue
Next, you'll want to estimate your potential earnings for each revenue stream. Since, as an early-stage startup, you don't have past sales data to rely on, it's a good idea to create at least two sets of projections: one optimistic and one conservative. This will give you a better sense of what to expect under different scenarios. Include not only your client revenue but also your funding.
For SaaS startups, one of the most important growth indicators is the Monthly Recurring Revenue (MRR), which needs to be considered for financial forecasting and planning. It measures the monthly account of total revenue that is subscription-based or recurring in nature and highly likely to continue. To calculate it, you multiply the average monthly subscription value per customer by the number of customers.
Calculation
Input your estimated monthly costs into your budget template to see how much capital you'll need to get started. Ideally, you’ve included some extra for emergencies or overspending. It’s common to experience some deficit spending in the early months. If the numbers look off compared to your initial plan, make adjustments before seeking additional capital.
Final budget considerations for startup founders
What if I need to lower my budget?
Go through your expenses and categorize them as essential (must-haves) or optional (nice-to-haves). Cut or reduce non-essential costs first. For example, can you skip a paid project management tool or use a free version? Could you use a coworking space and buy second-hand office equipment?
Why should I include branding and website costs in my startup budget?
81% of consumers say they need to trust a brand before considering a purchase. Effective branding helps establish your identity, attract customers, and create loyalty and trust, which can lead to long-term growth. Especially for startups, a well-crafted brand can communicate value quickly and set you apart from competitors, ultimately influencing how potential customers perceive your product or service.
Are startup costs tax deductible?
Numerous European countries have implemented tax relief programs tailored for startups and investors, increasing the resilience of the European tech startup ecosystem. The advantages depend strongly on the country: From the United Kingdom’s well-established Seed Enterprise Investment Scheme (SEIS) to more region-specific initiatives in countries like Spain, you can expect an average of 20% tax reduction.
If you're calculating your early-stage startup's finances, download our comprehensive Startup Budget Guide to help you break down key expenses. Get started and ensure you're budgeting for success.
Sources:
https://altar.io/incorporating-startup-eu-overview-tax-reliefs-country/ https://www.brex.com/journal/startup-budget
https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs
https://www.lightercapital.com/blog/how-to-calculate-revenue-potential
