Startups can have fluctuating revenue in their initial years and will require you to enforce proper financial strategies and careful processes to manage cash flow.
Startups are vulnerable to market conditions, changing trends, and the evolving preferences of their target audience, making it important for them to measure and track financial performance over time. Let’s start by understanding what startup financial planning entails and then look into its various components.
Understanding startup financial planning
As a startup founder, you must keep a tight leash on your financial performance and plan your finances diligently. The financial planning for your startup is an essential part of your business plan and includes important components such as a balance sheet, income statement, and cash flow statement.
While your initial financial plans can be basic and simple, when your startup starts growing and scaling up, you can tweak them and make them as detailed as you want. When prepared properly, these financial plans can help you gain valuable insights about your business performance and plan strategies accordingly.
The 4 primary components of a startup financial plan
With that in mind, let us now learn about the primary components of a typical startup financial plan.
1. Income statement
Also known as the profit and loss statement, your income statement is the most comprehensive record of your expenses and income. It will also tell you about any profit or losses that your business has incurred in the stipulated period.
It is the most direct reflection of the feasibility of your business idea. At the very least, your income statement will include the following aspects:
- Gross margin
- Revenue sources
- Cost of goods sold
- Operating expenses
- Earnings before interest, taxes, depreciation and amortisation (EBITDA).
2. Balance sheet
Your balance sheet is an important financial statement that will give you a quick overview of your company’s assets, liabilities, and shareholder equity. A typical balance sheet has three major sections: assets, liabilities, and the difference between the two.
Your balance sheet will help you better identify the allocation of resources, financial requirements, and capital needs of your business. Balance sheets will typically let you know the exact financial condition of your business on a specific date, so you can not miss out on this one.
3. Cash flow statement
As your startup grows, you’ll need to track the cash going in and out of your business, which is where a cash flow statement can help. A typical cash flow statement will help you understand your cash position and ability to meet monetary commitments.
Cash flow statements generally have three components:
- Cash disbursements
- Cash revenue projection
- Cash flow reconciliation.
4. Break-even analysis
Start-ups must calculate the return on their investments and conduct break-even analyses regularly. When done correctly, a break-even analysis helps startups determine whether their business or a specific product line will become profitable.
In the initial stages, businesses aim to achieve the break-even point, as anything beyond it is considered profitable. However, consider your fixed and variable costs to calculate your break-even point correctly.
How to create comprehensive financial plans for growing startups
1. Define your financial goals
You have to set financial goals at the outset when you are trying to draw up an effective financial plan for your startup. Only then will your financial plan be successful in helping you navigate the strategies and goals associated with your business.
For instance, if you are a growing software as a service (SaaS) startup preparing financial plans to seek funding or apply for venture capital financing rounds, you can ask your investors about the aspects they are looking for, and craft your financial plan accordingly. This financial plan would be more likely to succeed than a generic one you come up with without setting any goals.
2. Visualise and prepare for multiple scenarios
At the beginning of your financial planning process, you will likely deal with a few long-term strategies and goals. However, your financial plans can quickly get complicated if you do not have any end result in sight.
Your end result will help you highlight the most relevant sections of your financial plans so they are not lost within large volumes of data and information. Also, consider your financial performance in multiple scenarios and prepare upside, downside, and baseline financial plans for your business.
Upside plans are for best-case scenarios, such as if your small business finances skyrocket. Downside plans are for worst-case scenarios, such as if your revenue could contract. Then, there are baseline plans for when the business remains steady.
3. Prepare projections based on historical data
Take into account all your historical financial data and draw up projections about your expenses and income. You are likely to encounter a plethora of direct and indirect expenses. Some of these expenses are likely to be recurring, thus allowing you to track them and include them in your financial plans.
Also, when making projections, focus on high-level estimates based on your location, industry standards, and future expenses. Something as simple as creating invoices in Word and recording the data online can help you make accurate estimates and projections.
4. Consistently monitor and tweak your financials
For a growing startup, the current financial performance can differ greatly from the financial performance of the previous years. Financial planning is a continuous process, and every external and internal factor that affects your business can alter your financial performance.
Monitoring the financial performance of your business consistently will help you identify any potential issues in advance and resolve errors before they derail your finances. Moreover, you can also analyse your financial performance over the years, identify patterns, and tweak your strategy to position it for better financial performance.
5. Analyse financials to generate actionable insights
When you generate financial reports for your startup, you will not only have an overview of your financial performance but also get a detailed look into the financial and business health of your company.
However, financial planning must occur regularly and shouldn’t be an occasional occurrence. Continuously adjust your plan based on the insights you generate from your financial performance and inform your business strategy accordingly.
Create your startup financial plan
As a growing startup, you will have to come up with the right budget to manage your operations and robust strategies that help you stick to it. After that point, you can use the aforementioned steps to create comprehensive financial reports that can help you gain deeper insights into your business health and performance.
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