A whopping $58 billion in venture capital was invested into the startup ecosystem in 2015. If you are truly serious about launching your own startup then, now, more than ever, it is time to bring your idea for a company to life. To attract angel investors or venture capitalists, however, you’ll need an impressive business plan. Crafting a punchy executive statement and drumming up a market analysis are significant tasks, but they pale in comparison to crafting a financial plan, which is, arguably, your business plan’s most important component.
According to the Harvard Business Review, 75 percent of all startups fail. The percentage could be drastically lowered if the proper time and energy were invested into serious financial planning. This is why doing your homework is so very crucial. While plans often change, it’s important to lay one down before venturing out into unknown territory. Effective planning is critical to success as they guide you along your journey and help you deal with the inevitable bumps in the road. Financial plans allow you to describe the vision of your company in concrete ways. In other words, “It provides a comprehensive financial picture,” as David Ehrenberg from Early Growth Financial Services puts it. “[The financial plan] is going to force you to think through your business.”
Cold, hard numbers are the lifeblood of your financial plan. Without solid numbers to back up your claims, your business plan is essentially useless. You won’t be able to accurately predict where your startup will be in the next few years, what your prospective profits will be or how you plan to avoid bankruptcy.
Your financial plan will likely be broken up into three documents:
1. Income statement
In this document, you will account for the amount of money your company has generated and the amount your company has lost to expenses: your profit and your loss. If you’re a startup with no previous operating experience, this document may be your thoroughly researched projections. You can base these numbers off of existing competitors’ P&L statements.
2. Balance sheet
The balance sheet lists your startup’s assets and liabilities. In the simplest terms, you’ll list what you owe and what you owe on, and ensure that these numbers add up. This gives investors a picture of your business’s health. Again, as a startup, you may have no historical financial data to present. This means you’re going to need to make a projection.
3. Cash flow statement
Your cash flow statement will be based off of your balance sheet, sales forecasts and a few other important assumptions. It goes into further detail than your income statement as it describes how money will exit and enter your business. It does not account for future income generated from credit, however, and this is how it differs from both your income statement and your balance sheet.
Things to include:
Base your plan on industry data. You’re not going to have a monopoly, but you won’t need to in order to make money. Show you are aware of the market size and how your business will grow within it.
You’ll need to project your estimated sales for three years. Here you’ll go into the details of how you plan to price your product and how much predict you will sell. If you’re working off a SaaS (News - Alert) model, this may be harder to predict. Keep in mind your forecast does not need to be exact, and you will not be held to it. Do your best to give your best guess.
You must include the costs you’ll need to get off the ground, such as payroll and rent. You’ll also need to account for variable costs, such as marketing and advertising.
Breaking even, when your expenses and revenue match, is an important benchmark for your startup. You should attempt to approximate the time it will take your startup to achieve this. Most startups break even around 18 months, but this may vary depending on your chosen industry.
Things to avoid:
It’s tempting to get lost in magical thinking. Every company strives to be the very best, but try to keep your predictions realistic. Ground your predictions in real-world data. Wishful thinking is not a metric by which to predict rapid growth.
Your fixed expenses will rack up, there’s no getting around this. Don’t try to downplay them. You’re going to want to pay your employees competitively, for example. If you put unrealistically low salary expectations, your financial plan will not be accurate. Even if you plan to outsource work or hire freelancers to reduce expenses, you’ll need to account for the concomitant expenses.
Too much detail can make your financial plan seem unfocused. A financial plan is an educated guess. It’s more of a way for investors to see how well you know your business and how tuned in you are to metrics relevant to your success. Bogging down your plan with irrelevant or minute detail will not lend itself to this.
Budgeting for your startup is difficult. A sound financial plan will lay the foundation for your startup and hopefully attract shrewd investors. There is a great amount of research that must be done, and still, there’s no guarantee that your projections will be completely accurate. It’s more important to delve into every financial aspect of your startup and to learn the key metrics on which you will base your success than accurately predicting an unpredictable market, however. Take the time to get to know your industry intimately – this will come in handy no matter what is thrown at you.
About the Author
Charles Dearing is a veteran tech and marketing journalist with over 15 years of experience using words to move people to act. He has written for various publications such as ProBlogger, Big Think, Apps World, to name a few. You may connect with him on Twitter.