A financial plan is a necessity for every startup especially if you want to get investment from an angel investor, a venture capitalist, or even a family member or friend. However, sometimes startup financial planning can lack imagination. You might wonder why is financial planning important for startups? They provide insight into the company we can expect to see but not the one that we actually hope to build. In order to create a great financial plan that will have investors flocking at your doorstep, you must be able to picture the status quo and identify your company’s strengths and areas that need improvement. You must also be able to envision your company in the future with key markers for success. And finally, you should be able to work backward from that goal to systematically upgrade your business systems to work for your profit.
How do you write a financial plan for a startup? Well, one must bear in mind the following points.
Know your business: To be able to write a financial plan, you must first understand your business intimately and know the ins and outs of its functioning. Know what its strengths are, where the profit margin is higher, what are the areas that need improvement, make safe estimates when projecting expenses and sales, and be realistic. In every business, there are specific leverage points and you as a founder can push and pull for the desired effect. You need to understand where these levers are and how your system will react when you push or pull on them. Be forewarned that some of these interventions can have extreme effects. You should look at the business strengths and areas of improvement. In a crisis, these are the most vulnerable to change and are the best places to begin recovery; even minor changes can have a major impact.
Evaluate strengths and weaknesses: Evaluate your supplier and customer lists and understand where your revenue comes from and the other businesses in your ecosystem. In addition, take a good look at your processes and either slow down the business or act as a catalyst for growth. These might just include particular bottlenecks you have around paying suppliers or getting paid by customers. They might also include some sales processes that need updating. Understanding your strengths can help you use them to your advantage and give a boost to your business.
Understand the status quo: How do startups project financials? Well, based on the information you have about your business today – the cash burn rate, revenue from customers, and the level of investment you can determine when it might start to be profitable. Some startups however, will run out of money and go kaput. But this is not enough…you need to understand where you would be if the status quo continues. This allows you to push forward and build a company that beats all expectations.
Think outside the box: Now that you have your expected trajectory based on current projections it is time to envision the one you want to make in three years time. What will the company look like in three years? Although this is usually done as a three-year exercise, in a time of crisis or unprecedented change, you can do the same thing with more urgency. The purpose of this is to get you thinking out of the box and stop evaluating your business based on today’s assumptions. When circumstances have changed as they have with the pandemic, one of the best things to do is to plan backwards, beginning from cash flow to P&L, to sales leads.
Cash flow: In order to make your cash flow break-even, you need to reverse engineer cash flow for the months ahead. In the event that you need to generate $100,000 to keep the company going, you might consider taking the following actions.
- Speed up the cash invoice style and possibly automate it altogether.
- Address opportunity conversion rates and enable sales teams to close in faster.
- Identify pipeline revenue that can be brought forward with discounts or special offers.
- Look for opportunities to upsell with existing clients.
Anything that you can possibly do now to speed up lead times for the future will be of great help to the business. New payment or invoicing processes should also help increase cash flow and speed it up.
Don’t rush and let the experts in: Planning before going into execution is essential. Don’t just cut costs to see if the plan works. The goal should be to take small actions in regard to the pressure points you have identified. After all this, in case you are still wondering, how do you write a financial plan for a startup, it is time to let the experts in. CoffeMug.ai uses a sophisticated AI system to connect you with angel investors and a variety of other funding sources, including VCs. In addition, our experienced team members will assist you to evaluate the necessary papers, such as the pitch deck, business plan, and financial forecast, and will provide their expertise for a more effective presentation.
FAQs
Q. How do startups get financial projections?
A. Building financial projections often include creating copies of the primary financial statements (cash flow statement, profit and loss or income statement, and balance sheet) at specified time intervals, monthly or yearly in order to show how your cash, revenue, and expenses look like.
Q. How do you prepare projected financials?
A. A projected financial statement can be easily created in five steps-
- Create a sales forecast
- Make an expense projection
- Create a projection for your balance sheet
- Create a projected income statement
- Make a cash flow forecast
Q. What is a five-year projection?
A. A 5-year forecast is an estimate of your company’s financial performance over the next five years. It includes planned revenues, costs, expenses, cash flows (including any anticipated capital raises), and owner equity, as well as sales growth and margin projections.
Q. Why is financial projection important?
A. Financial projections allow you to see when you could require finance and when it’s optimal to invest in capital. They assist you in keeping track of cash flow, changing pricing, and modifying production schedules.
