By Emma Miller
How can you predict the financial outcome of your first year in business? Unless you have the gift of foresight, the next best thing you can do for your startup is to create a financial plan.
Easier said than done, since creating a sound financial strategy requires a lot of time and effort. Still, it’s better than making a costly decision further down the line. A decision that can mean the difference between your business soaring to the heights of success or plummeting to the depths of bankruptcy.
Starting your journey with a solid financial plan can ensure your business stays afloat during the first turbulent year. Since it’s a comprehensive document, there are even more reasons why it’s crucial to the success of your startup. Depending upon your level of business experience and familiarity with the financial side of things, you may find it advisable to consult with a financial planner who is skilled at helping people plan how to start a business .
A financial summary of your startup
The formula for a realistic financial plan starts with a balance sheet. To depict the value of your company at any given moment, this document is updated each month. Using important financial metrics, like liquidity and working capital, it gives you an overview of what your startup owns (assets), what it owes (liabilities) and its net worth (equity).
Since you can monitor progress over time, access to this information forms the foundation for all your financial estimates. You are able to create calculated projections and know exactly how much profit you need to generate.
This gives you greater financial maneuverability and allows you to set short-term benchmarks to tackle monthly or quarterly challenges. You are able to re-distribute funds or invest in profitable areas, without losing focus from your first-year goals.
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In the first year of operations, there are no previous financial records of your business. To supplement this lack of information, a financial projection is included in your financial plan, giving a forecast of future finances.
An essential component of your financial plan, a financial projection provides a fact-based estimate of financial health when you apply for funding. Essentially, it can secure start-up business loans from financial organizations and investors.
By outlining risk factors, market analysis and approximate KPIs (key performance indicators), you create a calculated financial scenario with a high probability of an outcome. In turn, this gives you a better sense of your capital requirements, while giving investors proof of stability that can win them over.
Sets realistic goals
Creating a financial model that works requires assessing your financial plan and setting achievable goals. This has proven to be difficult for numerous companies as they constantly shift between too conservative or too ambitious financial estimates.
A way to strike a balance between them is to create two separate sets of financial projections. A conservative estimate will keep your costs, investments, and returns inside a rigid structure to ensure profitability. Your ambitious estimate allows more flexibility and will motivate you to achieve your goals through innovation.
Predicts expenses
Since there are many external factors that affect revenue growth, most startups generally start their plans by outlining business expenses. They are far easier to evaluate because you have direct control over what’s included. This gives you a better overview of cash requirements and how much profit you need to generate for each month.
To start, make a list of all potential expenses and then divide them into three categories. First, include one-time expenses. Things you can write off because they are paid in full like tech and office supplies, and initial administration costs. In the second category list fixed monthly expenses like payrolls, utilities, insurance and legal fees, rent, phone bills and web hosting. Finally, variable expenses such as taxes, customer gains, churn and loss, production or service costs.
Remember that your expenditures can fluctuate. Overestimate your expense prediction to account for these price changes. Doubling, or even tripling estimates, leaves enough leeway to maneuver inside the budget.
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A sound financial strategy requires sales income to sustain positive financial growth. You will need to create a sales process, assess each phase, and then create a projection for it.
This will require market research. Once you collect the data, you can make a market projection based on key elements, like market size, your share of the market, financial power of your market, conversion rates, the total number of sales, and the total number of returning customers. Using these projections, you will have a clear understanding of:
-What numbers to expect each month
-How many price points to include;
-How many sales do you need per employee;
-How many sales you need monthly/quarterly/annually;
-Where you can improve your sales process;
-How much profit remains to be invested;
-How to achieve all of the above.
Conclusion
A realistic financial evaluation demands a lot of time and energy, but numbers won’t tell the entire story of your startup. All they can do is consolidate your goals with solid financial projections and help you make smart financial decisions grounded in research during that first difficult year of your business.
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Emma Miller is a digital marketer and blogger from Sydney. After getting a marketing degree she started working with Australian startups on business and marketing development. Emma writes for many relevant, industry related online publications and does a job of an Executive Editor at Bizzmark blog and a guest lecturer at Melbourne University. Interested in marketing, startups and latest business trends.
