Do we even have to talk about the stress level when you need one to build an economically viable business, boost your fundraising process, and constantly inform yourself and your shareholders about the state of your startup? Not really. However, we need to figure out how to create a system that will help you achieve everything mentioned above. And remain sane.
Estimate what you'll have on hand, month by month for cash, money owed to you, inventory if you have it, and tangible assets like venues or gear. Then count what you owe, aka your liabilities. The bills that you have not paid, or to give you some startup lingo, accounts payable.
Startups fail because they run out of money. And one of the main reasons they run out of money is because the founders are too scared even to project the losses. After all, they find the numbers that support their belief.
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A business plan is made of paragraphs; a financial plan is made of a giant Excel spreadsheet and your tears. The financial big three are cash flow statement, profit and loss (P&L), and balance sheet. Financial planning is part of the due diligence process.
These actions include:
What financial accounts, bank accounts, and credit cards, are you using for your business income and expenditures? How are you doing your bookkeeping: a spreadsheet, your dad's accountant, or some software?
Airdrop the above information into your financial plan. Make updates manually with a spreadsheet or automatically. Although it's less stressful if updates can be automated, this will give you more flexibility in decision-making.
Options vary. You can do a spreadsheet, find dedicated software, or outsource a CPA.
Get an Excel or a Google Sheet template from an online resource, or create it yourself. If you make it yourself, put somebody in charge to maintain it, and then later, a CFO can take it from there.
A bonus point: software tools like Finmark, Brixx, or Causal might be handy. But the essential thing, track your scale.
Know your endgame. After sketching out long-term strategies and goals, ask your investors what metrics matter the most to them.
This sentence is a sign to choose your company's KPIs. Remember, different metrics apply to other business models. For example, if you are a SaaS(y) company, include metrics like MRR (monthly recurring revenue), bank balance, and budget vs. actual.
See also: 31 key agency metrics & KPIs or 15 key SaaS metrics
Let's talk about milestones like acquiring a certain number of customers, raising a round of fundraising, or making an acquisition.
A generic template for all sorts of businesses will give you the idea, but you will have to find someone who knows Excel so that they can customize it according to your business's needs.
Fuelfinance people can do it for you if you are scared of spreadsheets. Remember, you are not supposed to be perfect at everything. However, we are. At least at making spreadsheets.
You'll need to import your existing information from different financial accounts like QuickBooks, bank accounts, and/or credit cards. For example, your bank data could be a statement, or it could literally be today's balance.
Here's a checklist to help:
There is an old saying in Tennessee, if your financial plan is a spreadsheet, you love manual work. And it also means that you have to export your existing data and then import it into your spreadsheet.
Sales costs (direct) include raw materials, production gear depreciation, hosting fees, etc. Everything else is indirect expenses. Among them, salaries and benefits are usually the biggest flex at this point. You might forget that in these expenses, you must include existing employees and forecast future hires to anticipate the extra cost of roles and salaries over time. Thus, the additional cost of bonuses they will expect. Be sure to include benefits and payroll taxes. Here is an example, three financial analysts, $70k each, start dates: June 2022, July 2021, and September 2019.
*Build a headcount plan by role for the pro forma period by month.
Here it would be best if you focused on high-level estimations based on industry standards, location, and company size. Things change; don't waste time perfecting predictions — they may not come true.
Basically, how will you make money? If your company is pre-revenue, you can begin with industry standards. Realistic income projections influence all other assumptions about profit and loss (P&L). If you mess these up, you may over-or understaff your company or make big purchases you can't afford.
Define the revenue levers, drivers, and assumptions. For example, revenue levers could be products and/or services, software maintenance agreements, or channel partner sales. You also need to identify which activities increase or decrease revenue and pricing and activity assumptions.
One important revenue projection for SaaS businesses is MRR. Here's an example of this type of revenue projection:
To project MRR using software, use this formula: MRR = total customers * average subscription price.
Convert the data into a digestible format to enable fast decision-making. A dashboard is a visual way to summarize and report on the data. It makes it easy for business owners, board members, and investors to look at and know the company's status.
Now that the estimates are complete, it is time to transform the work into a collection of facts that potential investors and business owners can use to drive decisions. The initial information and discussions should focus on high-level assumptions and give confidence that the business can scale and grow as the example outlines. – Tiffany Hovland, CPA, Journal of Accountancy
Using Excel for your financial plan, you can build these reports as pivot tables.
You need a sensitivity analysis. Now that you've made some hypotheses about the future, try playing with some different ones — some aggressive and some conservative. Alter some inputs and examine the reports in various scenarios. This will help you see how the assumptions relate and ensure that the end model makes sense.
Another way to test your beliefs is to correspond your company's metrics to those of other companies. For example, big players might check the SEC's website for public competitors or companies in a comparable space with matching net revenue. If you can't find a good comparison, you can check with investors to see which assumptions you should tweak. Then revise accordingly.
Do not be scared to test your financial model to make sure you dodge common traps in the financial models of startups. For example, you can find ten common errors below:
See also: Do's and dont's of creating a SaaS financial model
Just relax if you are still bargaining with yourself about whether you need to get a CFO or master Excel before you get on track with your business. We can do it for you. Let us create a financial plan for you. Then, we do the numbers, and you have more time to think about the strategy and growth. The last time we checked, this is what founders are for.
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