As part of your business loan or venture capital application, having a plan will help set realistic goals and monitor progress over time.
Financial planning includes forecasting and budgeting to identify any cash flow issues and take proactive measures – such as cutting expenses or finding additional sources of funds – before any issues become serious cashflow problems.
1. Establish realistic revenue and expense projections
Forecasting revenue and expenses accurately is key to the financial planning process for startups. Utilize historical data if available to create realistic (but optimistic!) revenue projections which will allow you to secure funding while meeting growth goals.
Expenses include everything spent to run your business, from fixed costs like rent and utilities, through recurring costs like inventory management and employee payroll to non-operating costs like income taxes. Accurately forecasting these costs is essential in making sure that your startup generates sufficient revenue to cover operating expenses and non-operational expenses like income taxes.
A cash flow statement provides a snapshot of your startup’s cash in-and-out flows over a specified time frame, such as sales projections, expense projections, profit and loss statements, balance sheets etc.
2. Establish a system for tracking actual revenue and expenses
Startups must keep tabs on actual revenues and expenses to meet their financial goals. By regularly comparing budgeted projections against actual performance, startups can identify any issues and make informed decisions regarding resource allocation.
Preparing an income statement (profit-and-loss statement), which shows your revenue and expenses over a set timeframe. Also included is a cash flow statement which details how much cash flows into and out of the company each month. Accurate estimates must also be provided for operating and non-operating expenses such as interest payments on loans and taxes.
Financial planning also involves deciding how your startup will secure funds to achieve its goals, including reviewing various funding options such as equity or debt financing from angel investors or venture capitalists or loans, or contingency plans to help it manage unexpected financial obstacles or fluctuations in the market.
3. Create a financial plan
Financial planning allows startups to set financial goals and allocate resources more efficiently, improving long-term viability and sustainability of the business. Unfortunately, this process can be time consuming and requires extensive knowledge of accounting principles, market dynamics and other relevant factors; to expedite this process and ensure accuracy it’s wise for startups to use a cloud-based financial planning tool as this can streamline and speed up this step in the planning process.
A comprehensive financial plan includes sales projections, expense budgets and capital expenditure plans. It outlines a startup’s financial position by outlining assets, liabilities and net worth calculations; additionally it can also feature break-even analyses which help determine when revenue will cover expenses and produce profits. Ideally it would include an ideal mix of equity financing (debt financing as needed) as well as alternative funding sources – this helps prevent additional rounds of funding as well as ownership dilution – and contingency plans which can be put into action should challenges arise that may cause unexpected setbacks or changes.
4. Monitor your progress
An effectively developed financial plan provides startups with data-driven insights, providing guidance for resource allocation and expansion opportunities. Furthermore, it shows potential investors that your startup has an established financial direction with goals to pursue.
Forecasting revenue and expenses is central to creating an effective budget, as it enables startups to accurately estimate their breakeven point and set achievable financial goals. Reliable projections require reasonable assumptions backed up with in-depth research; additionally, regular checks on actual revenues and expenses against projections should be performed.
Contingency plans should always be included as part of any startup’s overall business plan, to account for unexpected expenses or market fluctuations that arise, as they help ensure they can still meet revenue and expense projections even if things don’t go exactly according to plan.
