Let’s start with a gospel truth: A startup won’t start without proper financial planning. Yes, planning for the kind of service you are going to provide, how to market them, sell them to clients, your market share etc are really important but without any proper planning, they all remain in the world of “Wishful thinking”.
When you are starting a company, it can become a little overwhelming to think about the financial aspect of it, considering how complex financial parts of business are. In the early days, finances and business success are considered the DNA of success. Founders need to be mindful about the funds that are available to support the business before the company starts to generate revenue. If not then they will be forced to take time between building revenue and finding investments. In today’s day and age, acquiring funding is hard too for those who are starting from scratch. If finding investors doesn’t work then you might think of going to banks. But remember, banks want a long and proven track record of growth before even thinking about approving your loan.
A lot of questions come to mind when you are thinking of building your finances:
1: What is your cash flow situation?
2: How do you allocate your operational expenses?
3: What type of accounting methodology are you going to inculcate?
4: What accounting software are you going to use?
5: If things go bad, what’s the exit strategy?
When these questions arise, you need to be well prepared and lucky for you, we are here to help you navigate all that.
What are Startup Financials?
In simple terms, it’s the first step in building sustainable financial success for your business. This roadmap helps you predict and develop plans based on your industry’s historical performance, current industry research, and future possible trends. This gives a clear picture of making decisions and efforts that need to be put in to achieve your financial goals because financial planning entails all financial activities and real numbers. These numbers and data can help you predict your future financial position over a timeline based on values/ approximations. These approximations only come from historical data of your industry’s market data, the performance of the market, and plenty of industry research.
For starting out, you need a couple of things:
1: Balance sheet
2: Cash flow sheet
3: The Profit and Loss Statement (Helps you understand your revenue on the top line and baseline net income)
Now let’s zoom in a little bit:
Sales forecast:
It is essentially the best estimate of how much revenue your start-up will bring in for a certain period of time. To make this more realistic (and not delusional), look at the market demand, industry trends and how the competition has been faring. Use any historical data you have gathered as a foundation and adjust for anticipated growth.
Expense budget:
There is no way in heaven your startup can survive without a transparent understanding of the costs. This gives you a broader view of fixed and variable costs. Fixed can be rent, utilities, subscriptions, insurances and salaries for the talents who are working day and night for your vision. Variable costs, on the other hand, can purely depend on the market demands, fluctuations, sales volumes or production levels.
Cash flow projection:
This is where the heartbeat of your entire financial planning lies and we need this beating in a healthy manner. This component of planning is essential for maintaining liquidity and avoiding cash shortages that can halt your business for longer time. Consider this as the financial calendar that highlights months when you will be swimming in revenue and months where you might need a little buffer. Most importantly, it will help you to seek short term financing or postpone any expense if necessary.
Profit and Loss statement:
Also known as income statement, goes beyond the basic revenue and expenses to give a clear understanding of profitability. This is done by estimating costs, revenue and gross profit and it can help you gain insights on your pricing strategy and cost control that can impact your bottom line.
Balance Sheet Forecast:
This gives you a snapshot of your company’s assets and liabilities and equity at a specific point in time. In a startup situation, this might include cash, inventory and any owned equipment and liabilities could include loans or accounts payable.
Break Even Analysis:
The “when am I gonna see some profit?” is what break-even analysis is all about. This helps you identify the point where your revenue equals your total costs, which means no profit or loss. This helps in setting realistic sales targets, determining how aggressively to price the product you are selling and understanding when you might begin scaling up your operations.
Now let us understand the “Why” aspect of financial planning.
Why is this the most important step?
As you know, most founders might think of “skipping it” just to focus on other parts of building their future business empire. We are not saying they don’t consider some financial modeling, they do. But it’s really important for new start ups because many financial institutes and investors will look for your financial planning before they consider investing in your business.
This whole planning process, as boring as it sounds, is the foundation for a viable business model. This will help you quantify your assumptions about the business you want to start, especially when the ship might start to sink, this planning can act as a lifeboat in many scenarios.
Most importantly, this can help you set up key metrics for your business to measure success, failure and areas to improve. In the initial days, you wont see any profit and these metrics can help you determine the next steps.
We now know the “what” and the “why”. Let’s determine the “how” aspect of this planning process.
How to plan your startup financials:
This is where you take out you pen, or your computer and start creating that first plan. You might look at the empty screen or paper and start hyperventilating but fear not. We are here to hold your hands and help you write your first financial planning document.
Define your financial goals:
Where do you see your company in 1 year or 3 years or 5 years? Don’t tell us, write it down. Let us show you an example. Your short-term goal might include a monthly revenue of $10,000 within the first 6 months of starting the company (Yes dream big folks!). Your medium-term goal might include $1 Million in annual revenue and breaking even within the next 3 years. Now coming to long term planning, which will be expanding to new markets and generating $5 million in revenue.
This can eventually help you develop a benchmark for your company that you can clearly communicate with your team.
List down the costs that you will bear:
Starting a start-up is really not for the faint of heart as it is really costly. Some of the financial aspects of the business can get overlooked in the excitement and anticipation of launching your first MVP. So, it’s really important to create a detailed start-up costs which will include everything from product development to the guy who cleans the office space. Let us paint a picture here for you: You are operating a tech startup. Sounds exciting. Now let’s see where we need to allocate the funds. For your initial product development, you might assign $50,000 and with that an additional $20,000 for product improvement. You have a kickass product but people don’t know about it. Additional $20,000 for the marketing team please (only if your goal is to take the brand awareness and lead generation road). If you want to have a sales driven approach then $20000 for the sales team please. You need to be extremely clear here because this will set a foundation for your plans and this is what you are going to show to your investors.
Determine the projection of your business:
Cost planning is sorted now comes the part where you project your revenue and turn it into actionable expectations. Here is where you think like Elon Musk (from an entrepreneur point of view) and be a little bold too but at the same time be realistic. Here is a small example: You are running a subscription based product like Spotify and you are projecting to acquire around 50 to 75 customers within the first year, each paying $500 per month. That comes to almost around $300,000 give or take. With this projection you can start dividing it into fixed costs such as office rent, equipment and product subscriptions, and variable costs such as acquisition or marketing.
The reality check of break even point:
A lot of people find it sobering to even think of but it’s an essential reality check. This calculation helps you identify the point where your revenue will begin to cover costs. With this check you can start dividing it into fixed costs such as office rent, equipment and product subscriptions, and variable costs such as acquisition or marketing. For example: let’s say your fixed costs around $150,000 per year and each sale generates around $300 in contribution margin. This means that you will need to make enough sales to cover those costs which is about 500 subscriptions at $300 give or take to break even.
The Contingency Plan:
Sounds like something James Bond might say when his well defined plan went sideways. Just like him, things might go sideways when you are starting your startup because change is the only constant. Customers’ behavior might change or your competitors start to poach your clients or the market might be changing dynamically. Let us give you a small example: If you find that customer acquisition costs are much higher than expected, then you might need to switch from paid ads to a more organic approach. All these “what-ifs” strategies can help you communicate resilience and readiness for change.
Lay it all out:
Now that you have thought out everything, it’s important to put it out there on the paper/ screen. If you are hunting for a venture capital or maybe you are planning to bootstrap with smaller angel investments, it’s important to put all the above mentioned details in place. Let us illustrate how it looks: You determine a need for $500,000 in seed funding. Keeping that number in mind, outline how this funding will be deployed across different sectors. In a tech firm it can be between product development, customer acquisition and operational expenses. In your roadmap, every aspect of spending needs to be interlinked which showcases growth activities and ROI. This will demonstrate that every dollar they are spending on your dream has purpose.
Summarize it all:
Summarize the key financial insights, growth goals, funding requirements, and your vision for scaling in the document which you will present in front of the investors. For example, you can write, “Our SaaS company aims to break even within 3 years through a customer acquisition strategy focused on targeting mid-sized companies, with a $500,000 funding request to drive product development and support rapid scaling.” This summary is often the first part investors read, so ensure it makes an impactful, confident impression.
As daunting and exhausting this entire process may seem, it’s the most important safety net you need. It brings clarity to your goals, keeps costs in check, and helps you create a realistic roadmap that resonates with investors and other stakeholders. You can dream big, become the next Elon Musk if you have to with strong financial planning. So, don’t procrastinate and, like Nike’s tagline says “Just Do It”
