Small Business Financial Planning

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Key Takeaways

A financial plan could help you understand where your startup stands financially and allow you to make smarter strategic choices.
A cash flow prediction, an income statement, and a balance sheet are the three major aspects of a financial plan.
Your financial plan provides answers to critical questions that help you define and monitor objectives.
Financial management software provides you with the resources you need to make strategic choices quickly.
Developing a tailored financial strategy is a continuous process. As you go about trying to develop a financial plan for your startup, identify credible experts who can provide guidance and assist you in developing practical strategies.
Successful financial planning for a startup is a continual effort, and when implemented correctly, these tactics will improve performance while also demonstrating to customers and the staff that you care about their well-being.
It's like how airline companies advise you to put on your own breathing apparatus before assisting others: if you suddenly discover yourself in an onerous liquidity crunch, you won't be able to meet the demands of your customers or empower your team members.

What is Startup Financial Planning?

The best approach to long-term startup success is good planning. And sound financial planning is essential to that process. This kind of planning assists you in pitching to investors, forecasting growth, and coping with cash flow difficulties. To get started, you'll need to understand some of the most important aspects of financial planning. A financial plan will help you determine if a business concept is truly viable and then put you on the right course to fiscal viability as your startup grows. The financial plan consists of 3 accounting records: the cash flow statement, the income statement, and the balance sheet, and it's an important aspect of a broader business plan.

Why is Financial Planning for a Startup Important?

A well-thought-out financial strategy will help you build more confidence in your startup while also allowing you to truly understand how to spend resources wisely. It demonstrates your startup's commitment to fiscal responsibility. A financial plan can help you figure out how your decisions will affect your revenue and when you'll need to dip into your reserves.

It's also handy when you're trying to persuade investors to invest in your startup. Your financial strategy demonstrates how your startup handles spending and how it generates wealth. It demonstrates where your startup stands financially and how much money it requires from investors and from its sales to fulfill key financial targets.

Key Components of a Startup Financial Plan

Your financial plan should include the following:

Income Statement

The income statement (P&L or pro forma income statement) shows how your startup made or lost money over a fixed period of time, generally three months. It includes the following information:

Cost of products (how much would it cost to manufacture/provide your products or services) and cost of selling
Operational expenditures (such as rent and utility bills)
Revenue sources - sales, subscriptions, etc.
Gross margin: total net profit or loss

Balance sheet

The balance sheet allows you to see where you are right now, financially. How much do you possess and how much do you owe? You'll need to think about the following to answer these questions:

Assets: What’s the value of all the money, products, and commodities that you presently have?
Liabilities: How much do you owe to employees, landlords, creditors, and others?
Equity held by shareholders: The total wealth generated by your startup

HR Strategy

To achieve your objectives while maintaining a healthy income stream, you'll need the right team members. An HR strategy examines existing roles to determine when new team members are needed and if they should be hired full-time, part-time, or on a per-project basis. It examines pay scales as well as benefits and anticipates expenses.

Business Ratio

Gross profit margin, earnings per share, accounts payable cycle, assets-to-sales ratio, cash flow, and debt-to-asset ratio are all examples of business ratios. They are commonly used to request funds from a bank or other kinds of financiers, and the data used to compute these ratios comes from the P&L statement, balance sheet, and cash flow statement.

Cash Flow Statement

The cash flow statement is among the most important parts of your financial strategy. Cash is the lifeblood of your startup. The gap between your profit and cash position can be understood by properly recognizing how much money is flowing in and when to anticipate it. This should show how much money you have right now, where it's heading, and where it'll be coming from, as well as a corresponding timeline for every cash-related activity.

Sales Predictions

A sales forecast is an important aspect of any business/financial plan because it helps estimate cash flow and to gauge the general health of your startup. The actual sales figure on your P&L statement must be aligned sensibly with your sales projections. The extent to which you wish to track sales and the type of startup you've launched will determine how you structure and classify your sales forecast.

Assets and Liabilities

Your balance sheet includes both of these items. Your startup's assets include both current and long-term assets. Liabilities are corporate responsibilities that are similarly classified as either current or long-term.

Break-even Evaluation

Your sales income and volume targets will be guided by the break-even point: what amount do you have to sell to pay off all of your expenditures? Begin by deducting the cost of a commodity or service from the amount you pay to get your contribution margin. Analyzing your fixed expenses can help you figure out just what you'll need to price your products and/or services, as well as what sales and profits targets you should set to remain sustainable or to make a profit.

Tips for Startup Financial Planning

Financial planning for startups is a dynamic process. Your goals are generally as follows: Create short- and long-term startup and financial goals, as well as actionable strategies for achieving them. Evaluate your funding possibilities and do some situation modeling to analyze the financial constraints that could impact each level of growth.

Although many areas of small business financial planning are identical to managing private funds — think budgeting, risk assessment, taxation and investment techniques, pension and wealth management — there are a few key distinctions.

Evaluate all Funding Options

When considering how to procure capital, startup founders frequently start out by choosing to self-fund or bootstrap (which means that their personal resources are the sole or at least primary). It seems sensible to put capital back into the business: bootstrapping enables you to expand your venture slowly and sustainably whilst continuously verifying that the business model is financially feasible. On the flip side, your portfolio isn't well-balanced. Depending on how much capital your startup demands, using savings or credit cards for expenditures might put you in serious financial jeopardy. It's a good idea to mitigate some of that risk by looking into one or more extra funding options.

Balance Sheet

Your balance sheet may demonstrate that your startup is financially stable but it does not necessarily imply that its assets are liquid. It's a good idea to possess more assets than liabilities so that you can satisfy short-term financial responsibilities. And the people in charge of those additional sources of funding, such as business credit lines or inventory/receivables, will need you to have a handle on your cash flow. Some startups may wish to form a "cash committee" to keep track of daily KPIs (or OKRs) and report on them.

Cash Flow Statement

A solid cash flow allows you to satisfy immediate responsibilities, such as payroll and buying raw materials/equipment/software while setting aside capital for investment and contingencies. It's fantastic to have other assets including real estate or merchandise, but if cash flow is a problem, most startups will halt. A thorough cash flow investigation shows how much money is coming in and going out the door. This information helps you plan well ahead of time. When you perform these assessments on a regular basis, you'll have a historical perspective and be able to figure out how much you should be set aside as a buffer to withstand the leaner months or an unanticipated cash-flow deficit.

Tax Preparation

Following the DIY method might work for one's personal finances, but for a startup founder, tax preparation may be significantly more difficult. Outsourcing tax planning to a CPA or other financial professionals who may already be assisting you in running your startup will not only save you time but may also lower your tax liabilities. For instance, a CPA is generally well-versed in the tax regulations of your region and is someone whom you can consult on a variety of strategies, like how to optimize eligible business costs and how much to pay in estimated tax payments to avoid a large bill.

Risk Assessment

Identification and analysis of risk is something that every startup should undertake, but it frequently slips to the bottom of the priority list as it is a time-consuming task for founders who are already burdened with other responsibilities. Yes, it is extremely difficult to handle every risk that might potentially damage your startup. However, you can prioritize the risks and implement measures such as cybersecurity insurance and a crisis/emergency communications plan.

Startup Financial Planning Template

Download and compile these startup financial plan templates to include in your business strategy. To complement your business strategies and achieve greater buy-in from investors, create an outline of your startup's financial health using historical information and estimates for the future. This editable template from Smartsheet includes sections for a fiscal summary, any critical premises, key financial indicators and metrics, a break-even assessment, and a pro forma income statement to present crucial financial information to prospective investors.

Summary

Launching a startup can be exciting and daunting at the same time. It can be enticing to focus all of your time and energy on building your product or service, recruiting and onboarding the appropriate employees, and attracting customers. However, it's critical to set aside some time to focus on the startup's financial health. Developing a tailored financial strategy is a continuous process. As you go about trying to develop a financial plan for your startup, identify credible experts who can provide guidance and assist you in developing practical strategies. Successful startup financial planning is a continual effort, and when implemented correctly, these tactics will improve performance while also demonstrating to customers and the staff that you care about their well-being.

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