Are you wondering how to make a Financial Plan? You have landed in the right place.
In this guide, we will outline the fundamentals of a good financial plan. After reading this article, you will have a clear picture of your company’s current value, as well as your idea’s ability to earn in the future.
Are you interested? Keep reading.
WHAT IS A FINANCIAL PLAN?
The financial projection is the document that illustrates the company’s financial Plan. In short, it is the forecast of future revenue and expenses.
Through the Financial Plan, it will be possible to determine how your startup will be able to achieve the financial goals you have set for yourself. It is a way to plan for the future of your business.
In the world of startups, you can understand how important planning is by looking at how some of them, even without revenue, have huge valuations. This happens because the company’s value is also calculated, taking into account the expected future earnings.
Predicting, through a financial plan, the economic future of your startup is a fundamental step in establishing new strategies, regardless of its current size.
When a new business model is born, the creation of the financial plan is often managed by the founders of the same with the possible assistance of an external agency. As you grow up, the financial plan manager will be the CFO, eventually becoming a full-time job for an entire team.
The growing entity of financial complexity, employee counting, Income, and external financing are the engines of the evolution of the financial Plan in a startup. For this reason, it would be helpful to develop a new one every year and update it at least every six months.
WHAT DOES A FINANCIAL PLAN CONSIST OF?
So what’s the goal of a startup finance plan? What are the answers you will get and actually put into your business plan?
Here is the backbone of your financial Plan, the two fundamental aspects:
- Cash flow forecasts;
- Forecasts of profits or losses (forecast income statement);
There is also more detailed information that is included in the financial plan, such as:
- General assumptions
- Sales forecast
- Startup costs
- Management costs
- Salaries and contracts
- Financing Requirements
While the first three aspects might be intimidating for the less experienced, don’t be afraid because, in this guide, we will explain how to calculate each of them.
WHAT IS A FINANCIAL PROJECTION FOR?
While it might be tedious to make financial projections for your startup, the good news is that it’s an extremely worthwhile job.
A financial projection anticipates future growth and makes sense of the strategies to be implemented. It ensures good accounting and analyzes the profitability of the product. And, of course, it is used to determine the amount of money your business needs, when it is needed, and for how long. All startups can benefit from a well-made financial plan.
HOW ACCURATE SHOULD A FINANCIAL PLAN BE FOR A STARTUP?
We first recommended that you review your startup’s financial Plan every year. But rightly you have thought: “but how can I know where I will be exactly in one or more years?
Don’t worry. The goal of a financial plan is not to predict exactly how the future will go, also because infinite variables could lead you to success or, hopefully not, to failure.
All you need to do is try to be as informed as possible and base your financial Plan on reasonable expectations and research. It is normal that what will happen will be different from what you had planned. However, despite this, to know how to proceed with your startup, you need to have a potential future vision.
A five-year financial plan gives your startup the estimate to predict what it will look like after its startup period when it is fully functional.
HOW TO MAKE A FINANCIAL PLAN FOR YOUR STARTUP?
Now let’s see in detail what to include in a financial plan for your startup.
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CREATE YOUR STARTUP CASH FLOW REPORT
The first step in creating a financial plan is to develop a detailed report of your startup’s cash flows. For example, where and how much money goes out and how much comes in each month.
You then need to define your Cash Flow Statement. A cash flow statement helps you summarize all the cash flows of your startup.
The most important indicators of this document are:
- FCFF (Free Cash Flow to the Firm): ability to generate cash flows towards the startup;
- FCFE (Free cash flow to equity): ability to generate cash flows to repay debts;
- Net Cash flow: net financial balance at the end of the chosen period;
- Cumulated Cash Flow: bank balance at the end of the chosen period.
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ESTABLISH YOUR STARTUP’S FINANCIAL GOALS
Once you have detailed your Income and expenses, it is time to think about the future. And also, think about how to make a financial plan that will help you achieve your goals.
The first of these should always be to have an emergency fund in the event of a financial crisis.
So, ask yourself this question: “Where do I want to be in 5 years?” Avoid generic answers like “I want to be rich.” Rather answer: “I want to have an investment portfolio of $500,000”, and “I want my startup to work in international markets.”
Setting specific goals helps you stay on track with your financial Plan and truly understand what and how much you need.
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ESTIMATE THE REVENUES YOU EXPECT FOR YOUR STARTUP
Another important aspect of a financial plan for your startup is to estimate the expected revenues in the years to come.
It is about trying to imagine the increase in revenue of your startup. But be careful. Even in this case, you have to be somewhat realistic. Expecting revenue to turn into 9-digit numbers within a few months is highly unlikely.
For example, you must be aware of the size of the market you want to attack, which can be calculated with the TAM, SAM, and SOM methods. Besides, you must know the price of your product and your expected volumes. It helps you estimate how much you will earn by selling it.
In short, you must try to predict how future launches or market placements will make a difference in your cash flow and your income statement.
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ESTIMATE THE COSTS YOU EXPECT
In addition to estimating future revenues, in a financial plan, you must also estimate the costs that your startup will have to incur. On the other hand, putting a product on sale means both are earning, hopefully, but also increasing costs.
For instance? Production, sales, promotion costs, or commission costs for outsourced sales.
Being able to predict the costs associated with the creation of a product or service is essential for your startup. You will know if, through entering, you will be able to re-enter your expenses and, indeed, if you will also be able to earn.
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CREATE AN INVESTMENT PLAN
Another substantial part of your Financial Plan is to take into account the investments you plan to make in the coming years.
For example, with your startup, you will have to develop new software and buy new offices or patents. All these expenses often have significant costs, and arriving unprepared, or rather broke, is certainly not ideal.
Setting your goals puts you one step ahead, and you will know where you are allowed to spend and where you are not, and above all, how much. It is also helpful in asking investors in a pitch the amount you really need to carry out your project. Not only is that identifying future investments is extremely useful for depreciation operations.
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CREATE THE INCOME STATEMENT
The income statement is part of the financial statements. It indicates the economic result for the period of reference. Another important part of a financial plan is composed by:
- Value of production, for example, revenues from sales and more;
- Costs of production, such as those of products and services or wages;
- Financial Income and expenses;
- Value adjustments of financial assets and liabilities, such as revaluations or write-downs.
The important margins of the income statement are:
- EBITDA: efficiency in the management of company characteristics;
- EBIT: company margins net of depreciation;
- Net Income: entering or net losses.
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REVIEW YOUR FINANCIAL PLAN
Once a year, the financial plan you have drawn up must be redone from scratch. Take into account the new goals achieved and the new goals you have set for yourself.
In the middle of the year, however, it is revised to understand if the direction you are moving in is the right one. In the early stages, when you already invoice but the data is very uncertain, we recommend that you update it more frequently.
Then, monthly, it is updated with the actual turnover data and modified, if necessary, based on changes in the company or the market that suggest changes in the financial plan.
As you could have understood, the financial plan is a document that requires a lot of attention. It must be done and reviewed often and requires a long time to work. If you need a professional for financial projection for startups, count on us.