Every startup needs to have a solid business plan in order for it to survive the initial stages and grow into a successful business. Unfortunately writing a business plan that is credible and works is not as easy as just putting pen to paper and writing out of the top of one’s head. A business plan includes numerous aspects but one of the most important segments of it is the financial plan for a startup.
As a new business owner or a prospective business owner, you might wonder, what is a financial plan for a startup? Well, a business plan is entirely conceptual until you begin to fill in the numbers and terms of the business. Apart from the sections on business and marketing, you need to justify your business with good figures on the bottom line. This must be done in a distinct section of your business plan for financial forecasts and statements. The financial plan is imperative in order to obtain a bank loan or attract prospective investors. Even if you are not looking for funding you should make it a point to draw up a good financial plan in order to steer your business to success.
How do you write a financial analysis for a business plan, or how do you write a financial plan for a startup you might ask. At the outset, let’s clarify that the financial analysis is not accounting as we know it. Accounting looks back into time and is a historical view of the business while a financial plan is a forward-looking plan starting today and going into the future. In this case, you summarize and aggregate more than you might, unlike accounting which is detailed. The purpose of a financial plan is twofold; it is required if you are seeking investment from angel investors, venture capitalists, or even family members with a nose for business. They will want to see numbers that say your business is going to grow quickly and that there is an exit strategy for them during which they can make a profit. The most important reason why you need this though is for yourself; to understand how you project your business will do in the future. Any bank or investor will want to see these figures and understand how you intend to pay back your loan.
The rule of thumb when filling in the numbers in the financial section of your business plan is to be realistic. A startling and sharply rising trajectory is something that potential investors would love to see but even they know that it is, more often than not, unrealistic and not a believable forecast.
When it comes to what should be included in a financial plan it can be pretty simple if you follow a few basics. Segregate the figures into components by sales channel or target market segment and provide realistic estimates for sales and revenue. It is not exactly data since you are forecasting the future but if you divide the guess into component guesses it still looks better and feels better too. Remember you cannot win by overly optimistic or pessimistic forecasts so just remember to be real.
What angel investors look for: A financial forecast isn’t always compiled in a particular order or sequence. The final document will be presented in a different sequence than the one in which you compiled the figures and documents. For example, what is reflected in the cash flow plan might mean going back and forth to change estimates for sales and expenses.
- Start with a sales forecast: Create a spreadsheet projecting the sales of the last three years. Indicate sales for every month of the first year and monthly or quarterly for the subsequent years. This is necessary to calculate gross margin.
- Create an expenses budget: To understand how much it is going to cost you to make the sales you have to forecast this is a necessary step. Interests and taxes will have to be estimated. You should indicate fixed costs such as rent and payroll separately from variable costs such as advertising and promotional expenses.
- Develop a cash flow statement: It will show physical cash flowing in and out of the business. This is based partly on your sales forecasts, balance sheet items and other assumptions. An existing business should have these documents for the last three years and a new business should have a projection of a cash flow broken down for the next twelve months.
- Income projections: This is your pro forma profit and loss statement detailing profits for the next three years. Use numbers you put in sales forecasts, expense projections and cash flow statements.
- Deal with assets and liabilities: You also need a projected balance sheet and need to deal with assets and liabilities that are not in the profit and loss report and project the net worth of the company at the end of the financial year.
- Break even analysis: The breakeven point is your business expenses match your sales service volume. The three year income projection will enable you to make this analysis.
Keeping these points in mind is necessary to write a financial plan for our startup. CoffeeMug.ai is an AI-power-driven networking platform that flawlessly connects people, investors, and corporate leaders in the business landscape. Apart from helping the members on board discover inventive business opportunities, this global network provides 1:1 mentoring for entrepreneurs and assists them in generating financial support for startup businesses.
FAQs
Q. How do you start a financial plan for a startup?
A. You can start a financial plan for a startup in seven steps: set a goal, list sources of revenue, divide costs into revenue buckets, calculate the variable costs, consider interest and taxes, and create financial statement estimations.
Q. What are the 3 main financial statements?
A. Balance sheets, income statements, and cash flow statements are the three main financial statements.
Q. What should be included in a financial plan?
A. An effective financial statement must include the following components: financial goals, net worth statement, budget and cash flow planning, debt management plan, retirement plan, emergency funds, insurance coverage, and estimation plan.
Q. Why do I need a financial plan?
A. A financial plan essentially aids you in maintaining control over your income, expenses, and investments so that you may manage your finances and reach your objectives.
