Running Your Startup's Finances

Welcome to the fifth week of our exciting journey with PARACHUTE16; after exploring the building blocks of a thriving startup ecosystem and delving into the complexities of a robust business model, we now focus on a cornerstone of entrepreneurial success: Financial Planning. In this week's installment, we will guide you through the fundamental aspects of startup financial planning, demystifying key areas such as budgeting, cash flow management, and understanding essential financial metrics. Get ready to gain insights that could pave the way for your startup's financial stability and success.

Developing a thorough plan to manage your finances and accomplish your goals is known as financial planning. It entails evaluating a startup’s present financial condition, making clear goals, and creating a plan of action to get there in a predetermined amount of time. Effective financial planning is crucial for safeguarding your financial future and for making wise financial decisions, whether you are an individual, a family, or a business.

Determine the goal of the plan:?

Determining the goal of the plan allows the startup to choose how challenging to make the project. Having sufficient detail to demonstrate that you understand the market and what it will take to achieve key product milestones if you are raising funding and the financial planning is a component of the fundraising exercise. Your interactions with investors will become more detailed if the planning model needs to be simplified. Finally, it is typical to have a highly detailed analysis if your goal is to have a realistic cash flow forecast for an operating business.

Set your business’ KPIs:?

To really drive your startup, you typically want to use three to four, possibly five, KPIs (key performance). You can get ready to organize your main predictions and outputs by comprehending and organizing your KPIs. Start with the KPIs used by the industry/ market. Moreover, confirm that you can monitor and report on these KPIs.

Get a template:?

Look for a financial planning template that already exists and fits your company's model. Nearly always, existing templates make sense. Making a working spreadsheet takes time and could be more efficient. Use one of the numerous available free templates, which are usually found on the internet.?

Use your actual results as a starting point:?

Combine your projected outcomes with your actual results. This makes it easier for you to compare your projections to reality. Unless there is a valid reason, the first month of your predicted financial plan shouldn't contain any significant "jumps" from the historical figures. Problems include cases where a projection results in a sudden surge in sales, employment, etc. These errors could render your plan ineffective. It's best to start realistically first.

Start forecasting revenue:

Start with revenue and work your way down the income statement. Consider the factors affecting your revenue when estimating how much you'll earn. When estimating your revenue, you should also consider your cost of goods and services sold. Be aware that if you are preparing a hardware or biotech company with a long time to revenue, this makes NO sense. Instead, plan the effort you'll have to put in to attain important product development milestones for such companies.

Estimate headcount numbers:

The most expensive cost for a startup is usually its headcount. Choosing who to hire, when to hire them, and how much they will cost is a crucial part of the startup financial planning process.

Plans for other expenses:

There are several effective methods for estimating additional costs. One is to assess present costs and project their future growth. A better strategy is to comprehend how other, similar businesses (ones with similar business concepts) have developed over time. As the business expands, remember to throw on more costs. Ensure you include expenses because very few businesses have pre-tax profit margins higher than 50%!

Develop a working capital plan:?

Only some companies will need to do this, but working capital can be a significant funding source for businesses with inventory or customer payment delays. Regarding how long it takes for big clients to pay their invoices, be very realistic!

Review your financial plan:

Examine your completed plan in great detail. Verify that your initial financial predictions are accurate and align with your expectations for how the business will develop, expand, and handle cash. Additionally, reviewing it after each month or quarter is a wise move. You can spot patterns and potential issues in your financial plan and make any necessary corrections by evaluating it.

Financial planning is more than just a series of spreadsheets and calculations; it's the roadmap to your startup's success. At PARACHUTE16, we break down the complexities of financial planning, guiding you through essential elements such as budgeting, cash flow management, and key financial metrics. These tools aren't mere numbers but a strategic compass pointing your venture in the right direction.

Remember, a startup's financial health isn't static but an evolving and vital aspect that requires constant attention and nurturing. Just as a robust business model is a dynamic entity, so too is your financial plan. It's your guide through the unpredictable tides of entrepreneurship, allowing you to forecast, adapt, and grow.

Join us next week as we continue on our accelerator journey and dive into the importance of technology in your startup. Until then, keep budgeting, innovating, and paving your way to entrepreneurial excellence with PARACHUTE16!

PARACHUTE16 is an ecosystem enabler that builds high-quality acceleration programs and services for growth purposes. Reach out to schedule a meet-up over coffee and build impact together through our e-mail: [email protected]!