Why Do Startups Need a Financial Plan?
- Nov 13, 2023
- Kira Heizer
A financial plan doesn’t only serve the interests of investors—it also plays an important role for startups. In this video, you’ll learn what should be included in a financial plan, the different types of financial planning, and how a financial plan can help you prioritize and allocate resources.
Hello! I am Kira Heizer, Managing Director of Outsourced Services here at EisnerAmper.
I would like to tell you why it is important to have a financial plan for your business.
Entrepreneurs often think they need a financial plan to share with potential investors in order to raise money (and you do need a plan to raise money), but you also need a plan to run your business which will provide you and your team a roadmap to operate.
As an entrepreneur you probably have a goal, an idea of what you consider would be a successful outcome for your business. For instance, you may want to grow your business to $100m in sales or have a successful exit in three years. Within that overall goal, there are objectives that need to be met in order to achieve the goal.
In order to achieve your objectives and overall goals, you need a plan. You have limited time, and limited cash so you need to think through how best to allocate your resources.
Your financial forecast should outline what it will take for you to achieve your goals. For example, who are you hiring and what are you paying them: engineers (how many?), a sales team (how many?). What will be the price points of your product? What will it cost to produce your product? What are your assumptions on sales and timing to begin generating revenue?
The financial plan is the handbook (a roadmap) for the successful execution of your plan. Your team, investors, board and advisors all need to be aligned on the priorities – and importantly, aligned on how to allocate your very limited resources.
A financial plan has three parts, specifically three financial statements:
- The Profit & Loss (P&L) or Income Statement shows profitability. It shows the performance of the business over a period of time. It displays revenue at the very top then deducts the cost of goods sold (COGS) and operating expenses to get earnings (profit) during the period. This is where you can see whether or not your business is making money.
- The Balance Sheet shows the financial position at a point in time. The balance sheet displays the company’s assets, (including who owes you money), liabilities (your debts - who you owe money to), and shareholders’ equity.
- Statement of Cash Flows shows cash movements over a period of time as well as the beginning and ending balance of cash. This statement is critical as it shows you how much money you are spending in order to run your business. Your “cash burn” comes from this statement.
Most founders are fairly comfortable with the P&L, but do not pay enough attention to the balance sheet and cash flow statement. But it is worth the effort to understand these other statements. As Michael Dell said: “We were always focused on our P&L, and cash flow was not regularly discussed. Essentially, we were driving along looking at the speedometer, when, in fact, we were running out of gas!”
There are two main types of financial planning, and both should have all three statements:
- A budget which is a plan for one year.
- Normally, this is fairly static (Board approved and compensation related)
- And it’s more operational in nature.
You should perform a monthly variance analysis of actuals versus budget to see when you are off track on your revenue and cost assumptions.
- A forecast which is a three or five-year plan.
- This is more strategic and topline/big picture.
- It also tells the story of how your company will evolve and grow over time.
A forecast can, and should, be updated regularly, and you should play ‘what if’ scenarios with the cost and revenue drivers. Drivers are the business dynamics that power your business.
You should always look at best AND worst-case scenarios. Most entrepreneurs are optimists at heart – which is great! You have to believe in what you are doing! However, you also need to be prepared if things don’t work out perfectly. What if there is a three-month delay on your product development and you can’t launch your product? You need to be sure you have the cash to cover that delay.
In short, everyone with a business needs a plan – it helps you prioritize the use of resources, keeps you and your team aligned on where you are going, reminds you when you are off track and allows you to run ‘what if’ scenarios so you are prepared for the worst and best outcomes!
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Kira Heizer is a Managing Director and Head of Finance for the Outsourced Services Group.
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