Another point that needs to be made is that DEs also have to learn to accurately forecast and track the results of specific marketing and sales methods, then recalibrate their efforts for future seasons.

I think it makes sense to outsource certain aspects of marketing, but the cost of such should be relative to the bottom line – i.e., any outside consultant or company should be responsible for producing according to a quota in order to receive payment. Everything done with outside marketers should be performance based – consultants tend to overestimate their prowess and impact then underdeliver, while charging unfair fees. I consult – so I often hear the horror stories.

Here’s the thing. Amortization/capitalization are largely accounting terms that really have to do with end of year financial statements and taxes. For most small businesses, these aren’t budget concerns. If you are a small business and you have to spend $10K on your website, you have to spend $10K now, you don’t get to spend $2K over a five year period, and likewise should not budget as such. Large corporations usually play around with using capitalized expenses in their budgets because they have budget goals and restrictions and they want to stay on plan. They also defer expenses to other financial reporting periods (quarters or fiscal years) so that they meet their budget goals for the current reporting period so that the financial statements are on plan.

Small businesses generally can not plan this way because they have to rely on having accurate projections for the expenditure of cash. Otherwise, they suffer the all too often problem of being under capitalized and running out of cash. If you have to spend $10K on your website right now, then this year’s budget should include $10K for your website. Otherwise, you may find that you haven’t allocated or planned properly for expenses and you run out of money. When it’s time to do your taxes, you may have the ability to capitalize that over a period of time and take that $2K a year over 5 years, or in some cases, you may have to capitalize certain expenses, but in reality you had to pay the money upfront, not over a period of time.

These are different concerns. Small businesses have to look at budgeting differently than large corporations.

Another thing is that the period over which you amortize/capitalize or depreciate expenses is not arbitrary. In most cases, these periods of time are actually governed by IRS guidelines. You don’t get to take these expenses over the life of the business because remember, we are talking tax issues now. In cases where there are no hard and fast IRS guidelines, there are usually generally accepted periods of time that are used by accountants, which is why a lot of small businesses should have an accountant. You could find yourself in financial trouble using an arbitrary, but reasonable, time frame for capitalizing an expense when in fact there is an IRS guideline for that purpose.

This whole thing has kind of sidetracked the initial post because the reality is as a small/micro business when you budget, you budget for what you have to spend. Substituting with corporate reporting and tax practices on your budget could lead you to be out of synch with your cash flow.

I think we do need to discuss business and marketing more frequently. There’s a *lot* that goes into a DE firm. I’m curious if it’s prudent to look for other partners in the marketing arena.

For example, Andrea (and I) like Guy Kawasaki’s and Seth Godin’s blogs. I hesitate to say they are equally as substantive as FI but they raise topics on a timely basis, point out references and such.

JC brings up something else and I’m not sure if it warrants a separate post or not, but people who haven’t done something before tend to grossly underestimate how much it costs.

the most typical example I can think of is a website.

A lot of people think the cost/expense ends with the development and hosting. They don’t consider the cost to maintain the website (especially when they are unable to do it themselves), potential upgrades to their ecommerce software (which may not be free), SSL certificates (if they are not using an ASP), and search engine optimization.

A lot of people think that websites are “just found” in search engines, few will invest the time to learn how to optimize a website and almost all are amazed at the costs of hiring someone to do so. Then you have things like online advertising, pay per click or affiliate programs that a lot of start ups don’t consider becuase they think their cost ends at development and hosting.

No that all of these are essential, but a lot of businesses will need them and did not anticipate the cost.

This is why you have to be specific. I’m really anal retentive when it comes to small and (love this term JC) micro business financial planning. You really have to look at what, when, where and how. HOW am I going to make this work. WHEN do I have to spend the money, WHAT do I have to buy or pay for?

You can actually build a business plan by doing the financials first. A lot of people do the written portion first. But if you really crunched some numbers, you would pretty much have what you needed to write the text.

The article is pragmatic and sound. During startup, it’s difficult to project (though you can certainly try) how much money to allot to different areas. In the end, it costs what it costs to get started. Some costs have tax consequences (good or bad), while others do not – as in the aforementioned example.

Once you’re established, it becomes easier to allocate the budget because things become more clear. Also, you have data you can evaluate, which just isn’t available during Y1. Like Miracle, I would not suggest you try to “back into” a marketing budget during your first year. I suggest you outline the minimum requirements you need to get started and then focus on setting goals and raising funds.

For example: if a website is necessary for your business, then determine the appropriate budget by obtaining several quotes. Always think: ‘minimum requirement’ and ‘minimally necessary’ – this is bootstrapping.

The same for product development. Consider the absolute minimum you need to be market ready for the first season (3 pcs, 5 pcs, etc.) Go ahead an sketch 100 if you want; but, be brutal about what you release and get quotes from several sources so you can determine what is reasonable to spend. Be aware that your decisions about what to release will be heavily tied to cash-on-hand. You may choose to release a style that is cheaper to produce or has long-term returns over a “cute” or “quick hitter”.

I always start every micro business w/ a $500 marketing budget. Any arbitrary number will do, though!

Every year, when I’m planning, I evaluate the things I did last year, which things bore the most appropriate fruit, then move money away from the dead wood. I either ‘up’ the most productive choices or diversify the strategy. Let’s say I plan to increase revenue by 200% for 2008, I would adjust my topside (SWAG) estimate for marketing to $1000 and then shop to see what I can get. If $1K doesn’t support the goal, I look at what can be economized, elsewhere, in order to free more money for marketing.

Marketing budgets, as Miracle outlines, are relatively boilerplate/textbook for established corporations. Every company has a fixed percentage of the previous year’s revenues they allot toward marketing for the new year. As MW says, unless you have significant sales volume, percentages are useless for the micro-business – it’s all about scale.

While I consider a website to be a marketing vehicle, I do not consider that its sole purpose. A website is the virtual representation of your workspace – an overhead expense that is relatively fixed. Launching a website takes a long time to plan because you have to develop ways to drive traffic to your site. This is where marketing comes in: driving traffic to the site and giving people the ‘what’ they came to site for. I think investing in the physical workspace is the more prudent investment for a startup.

Frankly, I get a much better return for the $90 decal on the rear window of my truck. The sign discloses the website address; but, people call 9 times in 10. I have yet to hear anyone volunteer that my website is insufficient for their needs. Of the traffic generated by the sign on my car, maybe 3 (out of 60) per month pass through to my email – which they get off the website.