A Transparent Look Inside Our Process For Creating Buffer’s Annual Budget (Buffer Budget Series #1)

Though to many, creating a budget might sound rather uninteresting and isn’t necessarily synonymous with the exciting fast-paced growth of a startup or scaleup, we believe it is, in fact, a core part of creating a sustainable and healthy company. (Which is what makes budgeting so exciting to us!)

We haven’t always used a budget at Buffer to guide us towards financial health and our long-term goals, which in retrospect was a mistake. Last year was the first time we set very real financial goals and created a plan to see them through. We’ve learned a lot in the process of creating a budget and in the time since then.

In keeping up with our commitment to transparency, we’re keen to share a deeper level of financial transparency and learnings through a three-part blog post series. Here’s what you can expect:

• Part 1 (This post): We’ll share how we approached budget planning last Fall to fully prepare us for 2018. We’ll also discuss how we’re already thinking about adjusting our approach to budget planning for 2019 based on what we’ve learned in the first half of this year.
• Part 2(Coming August 2018): Next up, we’ll expand on our 2018 budget plan and dive into the real numbers from our most interesting budget categories, plus expand on how we decided to allocate our resources.
• Part 3(Coming October 2018): Finally, we will break down how each dollar of Buffer’s revenue is spent based on the budget plan.

This post is for you if you’re keen to learn more about how companies of Buffer’s size approach budgeting and adapt based on learnings along the way. There are numerous ways to approach budget planning, and this is just one way that has worked well for us. Let’s dive in!

A Brief History of Finances at Buffer

When our CEO, Joel Gascoigne, first started Buffer in 2010, he wasn’t able to work full-time on Buffer until he made at least $1,200 a month to cover his rent and other expenses. This goal set the stage for the mindset of conservative spending in that first year when getting Buffer off the ground was the main focus.

Over the next few years, Buffer was seeing fast growth, profitability, and raised the seed and Series A rounds of funding. As a team of 30, we were disciplined and sensible about our spending, yet based those spending decisions on whether we thought the expense would bring us a greater return. Our bank balance was growing, our customer base was growing and things were looking great!

In 2015, we started to see growth slowing a bit and made some strategic shifts to a self-management org structure, which impacted how we approached hiring. As we saw our growth rate start to slow down, and other operating metrics start to turn, we reacted with a plan to accelerate hiring to pick up the pace. And we really picked up the pace! We hired in batches, on-boarded new teammates in batches, and felt like we were leading financial decisions at a more sophisticated level. Over the course of a year, we tripled our team size from 34 to 94 people. And it wasn’t sustainable.

In 2016, we recognized the dire situation we were in. We were burning cash faster than we realized and needed to make an immediate correction. We significantly cut costs, setting the stage for a financial foundation that we recognized was necessary to implement.

In 2017, we set very specific financial goals and decided we needed another level of financial discipline. We had some leadership turnover in that year and as a result, got pretty serious about setting our long-term vision and strategy, and adjusting our financial approach to meet those goals.

Creating a concrete budget for the first time was the catalyst that helped launch us into the level of financial health we’re in now, with solid profitability on a monthly basis and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margins and net profit margins that we feel great about. We’ve seen these margins increase by 50% compared to this time last year which is just one indicator of our financial health. This position gives us the freedom and opportunity to take Buffer to new heights.

How We Created Our Budget For 2018

It’s typical that around early October, most companies are thinking about plans, strategy, and vision for the upcoming fiscal year. Finance teams are gearing up for a couple of months of review, analysis, financial reporting, and building the next year’s budget plan.

Last fall, we were excited to have the opportunity and freedom to approach our budget planning season more differently than we ever have. We wanted the budget process to find a comfortable seat alongside the conversations around the company vision, strategy, and area goals. We didn’t want the Finance team’s budget planning process to be independent of our Leadership team’s goal-setting process, as we truly see our budget as a guide ensuring that we’re able to offer the resources that our team needs to successfully implement company strategy.

We scratched our heads for a day or two and asked, “Where to begin?” And then we jumped in head first.

Step 1: Setting the Vision

We set the vision strategy for our budget planning process:

For this budget planning period, we aim to build on the successes and learnings of our first budget year in 2017. We’ll review actual spend to date for each area and invite all area leads to share their projections for resource needs in 2018, to anticipate what work is on the horizon, and to prioritize area needs. We’ll bring this information together and share a summary of all needs to identify any decisions to be made regarding resource trade-offs.

This helped us keep our intentions and ensure the whole team was on the same page.

Step 2: Setting Goals

Next up, our Finance team, in collaboration with Joel on the CEO level, created goals to further guide the project. Here’s what we came up with:

• Our budget process aims to form the foundation of shared goals, increase a sense of accountability, urgency, and realism while building business literacy throughout the organization.
• We’ll default to transparency throughout this budget process.
• By December 1st, we’ll provide a finalized 2018 budget to the team that incorporates extensive input and collaboration from all area leads and approval from Joel and the Board.
• We’ll provide guidance to leadership team so that they’re informed about the significance that budgeting has on strategy and company success so they can, in turn, make informed decisions on behalf of Buffer and the teammates they lead.
• We’ll use conservative year-over-year revenue growth projections to drive budget and spending decisions from 2018 onward.
• We’ll use the budget to mindfully allocate resources to allow teammates to fulfill the vision of Buffer and to serve our customers.

Step 3: Aligning with Revenue Projections

Before we dove into the details of budgeting we first took a look at aligning our budget with revenue growth expectations.

In practice, that meant several things. To start, we forecasted our 2018 – 2022 revenue expectations. Next up, we reviewed plans and goals for growth and free cash flow. Finally, we determined a healthy operating expense growth goal.

We then shared our overarching goal with the team, which was to stay at or below an 11% operating expense growth from 2017 to 2018. This meant growing our operating expense budget from $10.5M in 2017 to $11.6M in 2018.

Step 4: Having Collaborative Discussions

With a concrete target in mind, we created what we refer to as “area budget templates”, customized for each team: Product, Engineering, Customer Advocacy, Admin (Finance, Ops, and People), Marketing, and Data.

In these templates, we asked each Director to share their area goals for 2018 and provide insight into what each area was looking to achieve and the resources they’d need to make those goals happen.

Next, we asked for hiring and budget requests by category, framing the ask as “if you had a magic wand and could make a wish list, what would it be?” We provided context around the 2017 spend to-date for each budget category so that there was a starting point to understand how much might need to be budgeted for the following year.

It was insightful to hear what each Director wanted for their teams, and this wish list produced ideas we may not have thought of if we just forced a budget onto the leadership team. We also found this approach to be helpful in making the budget planning more of a collaborative process. Each Director was able to see their colleague’s wish list and it helped provide buy-in and understanding around the necessity to make resource trade-offs.

Another element we kept in mind is that a significant portion of our annual expenses ($1,500,000) is for hosting costs, an essential expense that allows us to offer Buffer as a service. In accounting language, we categorize these essentials as Costs of Goods Sold. With such a material annual impact, we decided to manage this category more closely. We created a template to review, budget, and monitor these hosting costs and to keep an eye on trends.

Step 5: Inevitable Trade-Offs

We ended up with about $1,100,000 of budget requests in excess of our operating expenses growth goal of $11.6M, so had some work to do to shave that down to a budget we could approve.

We had many conversations to decide how to best allocate our resources in order to achieve our 2018 goals, including team meetings discussing categories like our hiring plan, conferences, mini-retreats, and budget guidelines for raises and promotions.

Once we finalized the budget, we had more work to do to roll up each area budget into the final, company-wide budget and to share everything with the team in a digestible way.

The Timeline of Events: How Long Does it Take to Create a Budget?

We really started to think about our budget planning around September of 2017, here’s how it all went from there:

October 2017

We spent most of the month having discussions around strategy, goals, and reviewing our actual year-to-date spend for every expense category. Our Finance team then had discussions with each Executive to talk through their goals and the more granular level of their needs. Joel had follow-up meetings with each as well, to ensure that area goals and company goals were aligned and that each Executive would have the resources necessary to achieve their goals.

November 2017

By late November, we were having team discussions around the trade-offs necessary in order to meet our budget goals. It was these final decisions that helped us put the final pieces into place, allocating the budgeted dollars for each category.

December 2017

It took us through the first few weeks of December to get the budget to a place to finalize.

January 2018

Once we had Joel’s final board approval, we had more work to do! Throughout the first few weeks of the year, we worked to update internal resources such as expense guidelines for team members, considering new workflows for things like salary reviews and promotions, and then integrated the new budget into our financial models.

From start to finish, it took about three and a half months to project completion. We originally underestimated the amount of time it would take us to reach the finalized budget for approval but are glad to have this as a guideline for future discussions.

Looking Ahead to 2019

Although we consider this budget approach as a success in that it was just one of a few key reasons that we’re in the solid financial position we are today, we’ve identified areas we’d like to improve as we think about our 2019 budget plan. Two of our biggest learnings:

1. A fixed, static budget may not fully align with the pace of change, unique culture, decisions, and level of trust and freedom at Buffer. Exploring the idea of a rolling budget is likely a better fit.
2. Area level buy-in and collaboration are worth the extra time investment during the planning process.

Recently, we’ve also discussed how we’ve used our operating budget as a guide towards financial health, yet we don’t want it to be so restrictive that it takes over as a driver of our financial decisions. In other words, our conservative and sometimes strict approach with a static budget has served its purpose and now, we’re applying our learnings to raise the bar higher.

We review our financial statements, growth, margins, and profitability monthly along with our budget reports. We’ve also intertwined a regular review of liquidity, assets, our operational and financial metrics, and our short-term and long-term cash flow projections. We’re constantly evaluating our business, and are asking questions around investing our free cash flow back into the company by growing our team, increasing coaching and training opportunities, ideas for research and development and other ways that we can leverage growth. We see how all of these components are connected, and we update our forecasts and plans accordingly.

Last year, we found that the budget work, approval flows, and necessary conversations took more time than our ambitious timeline provided. We realized that because this was a newer, collaborative planning process for our team, there were some aspects that required multiple discussions and thus, took more time to communicate than we planned for.

This year when budgeting season rolls around, we’ll aim to make this an even more collaborative process with our Leadership team by starting earlier in the fall with a goal of finalizing our budget plan by mid-November.

Over to You

Thanks for reading along with this first post in our three-part series. Read part 2 of this series here where we share real numbers from our budget.

We’d love to hear from you! Have you ever created a company budget? What does your process look like? Please share any budget-related questions you may have in the comments and we’ll aim to add answers in our next post.