What does a start-up's financial plan need

Good financial planning is key to start-up success. Entrepreneurs are an ambitious bunch, leading to too many start-ups formed without prior planning. Marketing, growth, and direction should all be considered beforehand and the setting up stage should involve rigorous planning. To avoid the most common reason start-ups fail, financial planning should be the main focus in your financial planning stage.

In this blog post, we’re going to assist you in the financial planning stage so you can start your start-up with confidence. We’ll discuss what they are, what approaches to financial planning you can take, and outline the steps to create your own.

Financial planning for a start-up is creating a roadmap, laying out the plan for your company’s financial success. You will predict your financial success based on the following metrics:

• Expenses
• Projected revenue
• Margins
• Projected profit
• Break-even point
• Cash flows

It’s important to remember that you may not have all of this information ready to put into your first financial plan. This is because your financial plan is not a static document. It will change and adapt as your business grows and takes shape.

It would be difficult to understate the importance of financial planning. It has so many benefits to entrepreneurs putting together their first start-ups—as many as it does for seasoned business owners.

Increase confidence in your idea: a financial plan can instill a concrete kind of confidence in your idea. With a clear roadmap set out, you can move forward knowing at least where you aim to be, and how you aim to get there.

Attract better investors: for people to put up money and financially back your business, you need to demonstrate to them a forward-thinking and realistic approach to success. You can communicate this with a financial plan.

Build savings: having savings is not something you might expect when starting a start-up, especially at the beginning stages. But savings can help with emergency situations and growth plans. Financial planning will allow you to consider how to build savings from the beginning.

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There are two approaches to financial planning, each of which will better suit some business plans more than others.

Understanding which approach will suit you best is key to creating the right financial plan for your business.

This method is generally chosen by larger companies rather than start-ups, and usually ones in established industries with lots of available data. It involves analyzing macro data of the market your company is in, by first establishing the total addressable market (TAM) size in whichever currency you’re doing business in.

This is how business owners performing top down forecasting calculate their projected revenue. It suits larger companies better because they are entering established markets and determining how they will fit into them, rather than trying to break through into emerging markets which have more potential for growth.

Before performing top-down forecasting, review your decision:

• Do these estimates make sense for your company size?
• Are these kinds of market projections within your company’s operating capabilities?

To begin top-down forecasting, accumulate all the relevant data in your chosen market, on the major companies you will be competing with. You then need to calculate the TAM, which is done with this equation:

Revenues = TAM Size ($) x Market Share (%)

The percentage you are left with is the total revenue of the TAM your company can reasonably obtain.

The opposite to top-down forecasting, this method uses micro-level data to assess revenue over a chosen time period. Where top-down forecasting assesses the existing market data to determine the total, bottom-up forecasting calculates order numbers and sales expected from clients for a more accurate estimation of revenue. You basically start with nothing and calculate how much you could reasonably earn in a year or other given time period.

Bottom-up forecasting suits start-ups better because it provides a clearer picture of how specific performance metrics impact revenue. With this kind of analysis, business owners can determine the direct impact of what they do and how it drives their financial performance.

However, a combination of the two is most ideal. When you’ve determined your performance metrics on a micro level with a bottom-up analysis, you can determine the value of your company’s stock within the wider market by performing a top-down analysis. This kind of thorough analysis is much more likely to attract investors.

Now, let’s break down the key elements you need to include in your financial plan, similar to a balance sheet structure. We’ll discuss each component and how to include it.

Revenue is probably the single most important component of any financial plan. It is a cumulative calculation of the financial health of your business and its attractiveness to potential investors.

Calculating revenue usually means calculating net revenue. This excludes things like discounts and refunds, as opposed to gross revenue which is inclusive of these things. Net revenue is a more accurate representation of how your business is running.

Calculating revenue looks like this:

Units sold x average price - expenses and production costs

You should also factor in the customers like this:

Number of customers x average price per unit provided

Calculating cost of goods sold (COGS) means adding together all the costs required to produce your product and sell it. This includes things like:

• Employee salaries
• Production costs
• Materials

Calculating your COGS requires understanding a few important terms first:

• Beginning inventory: your company’s inventory from the previous period.
• Purchases: total costs of what you purchased in the specified period.
• Ending inventory: what remains at the end of the specified period.

Your COGS are then the result of this equation:

Beginning inventory + purchases – ending inventory

Your operating expenses are all the costs you incur during the daily running of your business. You calculate these over a given period of time—quarterly, monthly, or yearly—and they include every expense you incur to run your business that doesn’t fit into the COGS category.

Operational expenses (or ‘Opex’) include:

• Office rental
• Marketing costs
• Payroll
• etc.

Once you add all of these together, you will have your operating expense total.

Given that staff and hiring needs are very specific to each situation, there’s no singular equation that applies here. What’s important is that you assess your needs and hire accordingly.

When identifying your staffing needs, consider the following:

• What are my business goals? These include growth and expansion plans, as well as remote workforce, office needs, etc. What kind of a business do you want to create and how do you want to shape your workforce to fit that?

• What does your staff need? Do they need large teams to complete their tasks, or more skilled, fewer workers? Assess also the need for an office and remote working conditions for your staff, as well as what your workers need to do their best job.

• What staffing resources do you need? Many available softwares will make the process of organizing your staff much easier. Look into BambooHR for general staffing management, Jobvite Hire to simplify the hiring process, and USGS Workforce Planning Toolkit for templates to determine staffing needs.

Capital expenditures (CapEx) are what you spend on your physical assets. Upgrading or buying new software, renovating or expanding your office, and refining your production equipment all fall under the category of CapEx.

Calculating your CapEx will tell you how much you are spending on maintaining and upgrading the assets you use to expand and maintain your business. You capitalize on these expenses for the sake of your business.

Financing is how you fund your business to maintain and grow its operations. Split into debt and equity financing, assessing it requires looking at your cash flow statements.

Debt financing includes loan repayments, usually come with interest expenses, and can add risk to the business if unpaid.

Equity financing is the money you raise by selling shares in your business. These can be left to last to repay, unlike debt financing.

With the inputs established, we’re now going to go over the most important tasks for creating a financial plan for your start-up.

What do you want your business to achieve? Defining your goals is key to crafting a financial plan that supports and aids your business in achieving those goals.

Ideally, split your business goals into goals and objectives. Goals reflect the things you want to achieve with your business, whereas objectives demonstrate how you plan to achieve those goals.

Below are some examples of goals and corresponding objectives to achieve those goals:

One of the most important things to learn about start-ups is simply how much they cost to run. This figure will depend on what kind of business you are planning to run, so your first step should be defining your business type:

• Online
• Brick and mortar (conventional shopfront business)
• Service (trade, electrician, etc.)

With this in mind, you can better forecast the kinds of expenses you’re likely to incur. Here are some of the most common expenses for each type of business:

Online:

• Building a website
• Purchasing software
• Buying followers on social media

Brick and mortar:

• Rental costs
• Repairs
• Insurances

Service:

• Fuel and travel costs
• Insurances
• Union membership fees

Your sales forecast is designed to estimate the future sales of your business, with the goal of understanding how you can improve after the projected time period. With a sales forecast, you can both understand if your company is performing as you expect, and if your projections are unreasonable at this time and need to be adjusted.

Your sales forecast can use the top-down or bottom-up methods (see above).

Cash flow management is all about monitoring the money going in and out of your business. This makes it both extremely important and difficult when running a start-up.

There are some major hurdles you have to clear as a start-up when managing cash flow:

• Finite investor money: injections of cash from investors might incite a shopping spree, but remember that without long-term cash flow management the investor money will stop fast.

• Knowing where your money is coming from: especially at the beginning, start-up ventures can be rocky, with many ups and downs financially. This makes cash flow management especially difficult.

• Overestimating your growth: entrepreneurs are ambitious about their ideas, and this can lead to inaccurate projections which distorts cash flow management and sales forecasts. Try to reign in your ideas to a certain extent.

Projections and scenarios are all about considering what kind of problems your business might run into, and how you can protect yourself against them.

These are the kinds of things you can project for:

• Seasonal trends
• Price hikes in equipment
• Office expansion
• Staff loss/hiring increases

Creating scenarios around these situations means understanding how they can affect your business holistically, and what you can do about it.

One of the most important things you can do is review your work. This goes for almost anything we complete—a look back at what you’ve completed can help find mistakes, irrelevant information, and areas in which you can expand.

Financial plans are no different. After completing yours, take a day or two before looking at it again so you can review with a clear mind. Then, once you’ve reviewed it yourself, ask a friend or professional to take a look at it and see if they notice any glaring issues you might have missed yourself.

Financial planning works by solidifying your financial goals for your business. You clarify the decisions you make by projecting outcomes and putting aside funds for specific scenarios. In turn, this kind of planning creates a realistic proposal for investors who can see promise backed up by evidence and intelligent problem solving ahead of time.

Once your financial plan is completed, you’ll be rewarded with several resources that are going to better establish your business and put it in the position to grow.

Financial statements are what analysts use to glean information about your business’s financial activities and performance. They are crucial for attracting investors, being audited, and making stock price predictions.

Your cash flow overview is a picture of how much cash your business brought in over a given period. The overview is generally broken down into the following categories:

• Operating activities
• Investments
• Financing activities

Your overview will provide for you a better understanding of how each of these areas is generating profitability, or holding you back.

KPIs (Key Performance Indicators) are quantifiable measures of performance over a given period of time. Companies usually divide KPIs into quarterly targets, allowing the KPIs to develop based on performance.

KPIs are not hard and fast goals that must be completed by a certain deadline, but certain targets which, whether reached or not, give an indication of the company’s performance.

Your financial plan is a document forecasting the financial success of your business, making it a useful component alongside KPIs. Develop your KPIs concurrently with the financial plan and assess their status based on whether you meet the projections in your financial plan, or they need to be adjusted.

Now that we’ve discussed financial plans and their benefits in detail, we’re going to leave you with 5 brief tips on writing a good financial plan for your start-up.

You may have a clear picture in your head of the business you want and how you want to get there, but consider alternatives, too. Business is fickle and circumstances out of your control can change the future of your business. Adapt to it and plan for multiple scenarios in which your business is still thriving.

Inflation, and in extreme cases, hyperinflation, will affect the course of your business. Your financial plan is your navigation path through the rocky waters of inflation. Consider how weather fluctuations cause production prices to fluctuate, and the gradual steady increase of things overtime.

Taking care of your employees is key to a healthy business. As long as you are paying your employees fairly and compensating them, they will continue to enable your business to thrive.

Also called revenue streams, the question here is simple: where is your money coming from? Remain aware of your revenue streams and observe their fluctuations. Does your money come more from investments or the production of goods and services? How are economic factors impacting these revenue streams and what can you do to correct this?

Finally, come back to your financial plan regularly with a critical eye. Not only this, but share it with friends and professionals who are qualified to give you helpful feedback on the plan. It can only be improved with regular revisits.