A financial plan serves as a strategic roadmap for your startup, similar to a game plan. It provides a comprehensive overview of your company’s present financial situation, future objectives, the steps you will take to achieve those goals, and the associated costs.
Financial planning involves the process of assembling and documenting your game plan. By utilizing data, you make informed assumptions about revenue, expenses, and other financial aspects of your business to project its financial trajectory. This helps you gain insight into the expected financial performance of your business in the future.
Purpose of financial planning for a startup
Developing a comprehensive financial plan is crucial for the success of a startup. Firstly, potential investors typically require a startup’s financial plan as a prerequisite for considering funding. Moreover, a financial plan enables you to quantify your business assumptions, establish clear benchmarks, prepare for different scenarios (both favorable and unfavorable), and assess your company’s progress even before generating profits. It serves as a valuable tool to measure and track the success of your startup.
The financial plan for your startup is the blueprint that outlines the path to achieving your company’s financial success. It involves making predictions and creating strategies based on historical performance and industry research. The financial plan begins with an analysis of your current financial situation and incorporates future objectives and forecasts. It enables you to develop a strategic plan to achieve those goals.
Come up with a scenario to help you stay prepared
In a perfect scenario, revenue would consistently increase, and unexpected expenses would be nonexistent. However, in reality, this is rarely the case for businesses. While no one wishes for the worst-case scenario, planning for it in advance can greatly improve your ability to navigate through challenges if they arise. That’s why we suggest creating downside, upside, and baseline scenarios as part of your financial planning. These scenarios involve different assumptions about your business’s growth, ensuring you are better prepared for any circumstances that may arise.
A baseline financial plan is crucial as a benchmark for your company’s performance. By relying on historical data, it becomes a reliable indicator of whether your business is trending upward or downward. The baseline financial plan acts as a reference point, allowing you to accurately assess the progress of your company.
Choose the right tool
When creating a financial plan, you have several tool options. You can utilize a spreadsheet, a dedicated software, or outsource the task to a Certified Public Accountant (CPA). If you decide to use a spreadsheet, you have the flexibility to download a pre-designed template from online resources like Excel or Google Sheets, or you can create your own from scratch. Alternatively, you can consider consulting with a professional, such as Joseph Stone Capital, to assist you in building a customized financial plan. This option can provide you with the assurance and peace of mind that your financial plan is accurate.
Be prepared for unexpected expenses
Often founders make mistakes in financial planning by assuming expenses will remain constant over time. In reality, as your company grows, expenses will also increase.
There is a prevalent misconception that higher expenses are always negative. While escalating expenses can be detrimental if they involve unnecessary expenditures, it’s essential to consider the common ones associated with growth, such as employees, workspace, and the cost of goods sold (COGS). These expenses are often necessary investments for the expansion of your business.
Creating a budget is crucial for maintaining control over your cash flow. Without a budget, it will be difficult to track and manage finances. A budget provides a clear picture of your incoming funds and allocation.
Establish several categories for your costs, such as fixed and variable, needs and indulgences, and unnecessary and necessary before you start spending. This process helps you create a comprehensive inventory of your expenses. By transforming abstract financial concepts into tangible elements, you can understand and have control over them.
Your financial plan should not be made and forgotten until a significant event, such as fundraising, occurs. Growing a startup involves unexpected twists and turns. Your financial plan should be your playbook, continuously referenced and adjusted based on the evolving situation. If you’re unsure where to begin or how to adapt your financial plan, seeking advice from a reliable source like Joseph Stone Capital is highly recommended. Taking a proactive approach to regularly reviewing and refining your financial plan is essential for navigating the dynamic landscape of a startup.