What is startup financial planning?
A startup can be said as an enterprise which is often new, smaller and more agile in nature. They are often more flexible and innovative on the go, but they can also face a lot of struggles.
The first thing that many startups often overlook is the need for financial planning. They are so focused on the product they want to launch and the customers they want to target, that they forget about their cash flow. Every startup needs to know exactly where they stand financially in order to make sound decisions.
Since a startup is one of the riskiest ventures anyone can take up in their lifetime, it is important to understand how to lay a strong foundation for it. You need to make all efforts from getting a solid team on-board to getting your startup business plan ready for execution. You need to always keep your eye on the finances and be prudent. All those BMW, Hermes, Rolex and a big bungalow can wait.
When is the right time to plan for startup financial planning?
There is no clear-cut answer to this question. Financial planning is important and founders should do it early on in their startups, but there are also cases where startup financial planning is postponed until after the startup has started operating for at least half a year as founders need to develop some assumptions and minimum viable product (MVP) first before they lock-in the financial estimates.
If you’re thinking about starting a business or at least considering the idea, think about when is the right time to start planning for startup financial planning. Coming from our personal experience, the best time to start planning is before you quit your job, so this new venture doesn’t negatively affect your current financial security and stability.
What should be in your startup financial plan?
A startup financial plan is a strategy to calculate the amount of money you need, and when you will need it. This type of plan is essential for every startup founder who wishes to start a company and/or expand an already existing one.
A startup financial plan consists of the following:
1) Calculate current company’s needs,
2) Set long-term goals,
3) Calculate growth rate in sales,
4) Estimate clients’ acquisition costs
5) Formulating your pricing be it product or service
6) Calculate the number of years the company has been in operation or will be based on average business cycle,
7) Estimate future market conditions,
8) Estimate tax rates for each year into the future,
9) Factor in all risk factors that could cause a change in cash flow and possible mitigation plans
A startup financial plan should also include a buffer for emergency funds, considering the first three years are the first crucial phase of your startup.
Developing a financial plan doesn’t end with just one set of projections; it’s important to constantly update your projections as your company grows over time.
What comes next after developing your startup financial plan?
Now that you know how much money you’ll need in your first to three years of your business, next, founders should consider how you will finance your startup. Some possible sources of funding include: bootstrapping (founder’s personal finances), customer revenue, angel investors, grants or funding agencies, friends or family.
The best way for a startup is to start out with a small amount of money and bootstrapping the business by using the founders’ own funds as much as possible over time. This often takes more work but ultimately the rewards are greater in the long term. Committing to a loan or financing upfront when you’re still testing out your ideas can be harmful to you and your business especially when you have no sales inflow just yet.
One of our favourite startup book, The Lean Startup by Eric Ries have insightful tips and knowledge that could accelerate your understanding on how you could design your business and financial plan.
How can you design your startup financial plan?
We have worked with many startups to design and personalise their own unique startup financial plans. Check out our startup programmes where founders and their valuable team players come together for two days to formulate their strategies and finances. Work with us to kick off your startup financial plan. Contact us here and we’ll be in touch within 24 hours.