Why is effective financial planning for startup company financing a critical exercise for founders? Without a detailed financial model, you’ll find it impossible to create a roadmap for your company’s success. Most importantly, investors conducting their due diligence when you pitch for funding will want to examine your company’s financials.
Financial planning ensures that you have an efficient handle on the company’s expenses, revenues, and cash flows. That’s how you can ensure that it stays afloat.
Statistics indicate that regardless of the industry, 70% of startups fail between the first two and seven years. The second-most common reason for failure is entrepreneurs running out of personal funds to run the company. And their inability to raise funding from investors. At least 38% of startups go out of business as a result.
These statistics point to two main factors. Firstly, you need to stay on top of the company’s financial status at every step. Secondly, as a savvy entrepreneur, be aware that you need to raise funding. And before you complete every successful round, you need to start planning for the next.
Read ahead for detailed information on how to plan your finances, keeping a laser-pointed focus on impressing investors with credibility. And acquiring funding.
The Ultimate Guide To Pitch Decks
Financial Planning for Startup Company Financing – What You Need to Know
Financial planning for startup company financing involves several aspects, and getting assistance from a trained professional is advisable. Retain the services of an expert advisor who can direct you with crunching numbers and analyzing data.
Reviewing the data month after month, adjusting the plan as needed, and ensuring you’re on the right track to achieving your long-term goals are all part of their job description. They’ll also help you estimate the funds and other resources you’ll need to achieve those goals.
Accordingly, you can make the right decisions that align with the company’s long-term objectives.
Financials for Potential Investors
Your financials is one of the most critical slides of the pitch deck presented to investors. Before giving you millions of dollars, they’ll need assurance that the company’s financial health is secure. They’ll want to see a clearly-executed game plan that reveals how you intend to use the funding. And repay it with equity or interest.
Investors also need an overview of how you’ll allocate available resources and whether the venture is generating adequate revenues. More importantly, they need affirmation that the company is prepped strategically for sustained growth.
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Determine the Company’s Future Growth Trajectory
Financial planning is all about estimating the startup’s future growth trajectory according to the resources you have available. You’ll determine variables like the maximum revenue the venture can generate and the months of runway you can count on.
The company runway is the amount of cash you have that will sustain the company. And keep it running for a specific number of months. Also, estimate your sales, marketing, and advertising costs and the investment in human resources.
The customer churn rate is yet another variable to focus on. At least 35% of new ventures were unable to make it because they couldn’t generate a market for their products. And 20% were edged out by the competition.
Considering that top-notch talent is the key factor that can make or break a startup, this should be a primary concern. Remember that at least 14% of startups fail because they don’t have the right team. Another 7% went under because of a lack of coordination between the team and company investors.
Having the right team is not just critical for your startup’s success. But it can also influence how investors view your pitch deck. So, add a list of core skills and their profiles to your team slide when creating the pitch deck.
A robust financial plan should plan for these costs and ensure that adequate funds are allocated to acquiring them.
Plan for Unexpected Setbacks
A great financial plan is like a benchmark that will help you determine how the company is performing over the years. Using this benchmark, you’ll plan for contingencies or worst-case situations.
Investors looking at your financials need to see that the company is prepared for shortfalls. It should have the ability to remain stable regardless of adverse situations. Let’s try a few examples:
Increasing Churn Rate
An increasing churn rate means that you’ll need to acquire new clients. But, at minimum Customer Acquisition Costs (CAC). To make that happen, you’ll raise advertising and marketing efforts.
However, you’ll also plan for extended CAC payback. This is the time lag between your advertising efforts and new client acquisition. Side-by-side, you’ll plan for uncertain average revenue per account (ARPA), which can, in turn, affect your revenues and cash flows.
Do you have the necessary cash reserves to see the company through this setback?
Higher Burn Rate
A higher burn rate means the total money the company is burning month after month. This figure includes the expenses you’ll incur to keep the venture in operating condition. Or, you might call it the negative cash flow.
Your burn rate includes static expenses, overheads, costs of inventory, and more. Burn rates can rise because of internal and external factors like rising costs of inventory or production expenses, including overheads.
Changes in government and legal regulations or overall economic conditions can also affect the burn rate. Keep in mind that at least 18% of startups close shop because they are unable to keep up with changing federal policies.
Your financial plan should be prepped to deal with such contingencies. Investors need to see how you’ll maintain the burn rate or deal with a situation where the revenues can’t keep up with costs.
The plan will also reflect how you intend to maintain the revenue inflow to keep the company stable and operational. More so, it will indicate the time frame within which you’ll need additional funding to keep the company growing.
You’ll also put together a financial model that shows how you intend to use the money you raise to sustain the venture’s growth trajectory.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Plan for increasing Expenses as the Company Grows
Financial planning for startup company financing includes forecasting expenses as the company grows. Rising expenses are not necessarily a bad thing, and investors might expect to see this spike. Here’s how:
- You may need to move the venture to more spacious premises if you’re working out of a physical location.
- Hiring more talent should also be one of your priorities which means you’re also allocating money toward product research and development. But plan for the costs of recruiting, hiring, onboarding, and retaining employees.
- Higher advertising and marketing costs are another positive because it indicates more customers and higher revenues down the line.
- Investing in upgraded equipment, tools, software, and hardware are also positive expenses.
- As you raise production to meet increasing demand, expect your Cost of Goods Sold or COGS to rise. This figure denotes the direct costs of manufacturing your goods, such as inventory, labor, and other expenses.
- Providing better customer support should also factor in the increasing costs. Close to 64% of new ventures noted higher sales because of good customer service. Bringing in specialized teams to manage customers and deal with their concerns is a sign of growth.
Adding these data to your financial plan indicates that you have a robust growth model. And that the company is prepared to handle the additional costs that come with it. That’s something investors want to see in a compelling financial plan.
Track Cash Flows
Tracking cash flows is critical because you’ll trace the rate at which money flows in and out of the startup. A cash outflow can quickly bankrupt the company if it is not matched with a quicker inflow.
Let’s assume your company manufactures and sells physical products. Your cash outflow starts with acquiring inventory, renting warehouse and production premises, and payroll or labor costs. You’ll also plan for advertising costs and logistics and the time lag before revenues start to roll in.
Not only are companies uncertain about making sales, but they must also invest in inventory to continue manufacturing. They must do this in anticipation of future orders and demand.
Planning this entire cycle efficiently is essential to plan for the cash in hand you must have to keep the business running. Getting this cycle right assures potential investors that you have the skills to manage the startup’s finances.
While investors assess a startup’s health by looking at the numbers and profitability data, they are also focused on the founders. They want to know the face behind the brand and its proficiency as a businessman.
Ensure Consistent Revenues
Next to cash flows, financial planning for startup company financing includes positive and consistent revenues. Entrepreneurs need to be practical and realistic about their venture’s revenue sources. The obvious answer is sales of your products.
But more than that, you’ll need to focus on how to make those sales recurring. A startup trying to manage a steady cash inflow can rely on several strategies to establish itself as a brand.
Marketing approaches can include introductory deals, free trials, and the option to cover the cost in smaller monthly payments. These offers work well for big-ticket purchases by lowering the entry barrier for small customers.
At the same time, it allows the brand to prove credibility while ensuring recurring cash revenue. Keep an eye on your pricing structure because at least 15% of startups go out of business because of poor pricing.
Founders should also focus on the drivers that will bring in the revenues–namely advertising and marketing. Your financial plan should also cover the costs of creating effective funnels to draw in paying customers. So, make sure to factor in the costs of generating leads and the cost per lead.
Consistent revenues and robust advertising strategies build confidence in investors’ minds. It proves that the startup is performing well and has adequate traction for the future.
But, what happens if the startup has yet to generate revenues? How to present financials to investors in that scenario? It can be done. Check out this video I have created explaining how to navigate this challenge. You’re sure to find it interesting.
Review Your Financial Plans Regularly
With the assistance of your business advisor, you must review the financial plan and factor in the startup’s evolution. As the company grows, you can eliminate certain costs that are no longer relevant or add expenses that you hadn’t anticipated previously.
For instance, aggressive advertising strategies are needed to keep up with the upcoming competition. Or, new innovations are threatening to make your product line obsolete, and you need to come up with solutions quickly.
Hiring new talent can also stress out your financial plan when you need to plan for their expenses. In addition to salaries and perks, you may have to offer option pools to retain high-profile employees.
The pandemic also taught founders how quickly and unexpectedly economic conditions can alter, and being prepared for such situations is critical.
Fundraising is an activity that founders undertake 24 to 30 months to ensure runway. But updating their financial plan more regularly ensures success when it’s time for the next funding round.
Financial planning for startup company financing can be a valuable tool for founders. Having a detailed plan in hand allows them to stay in control of the venture’s financial progress. The same plan comes in handy when entrepreneurs are pitching funding drives to investors.
However, financial plans should also be flexible, which means that you should be ready to adapt to changing market conditions. For instance, you might find that a particular product is not performing as well as expected. Or, that you choose to market a second product more aggressively.
The financial plan should have the bandwidth to sustain any pivots as the venture grows. Watch out for such situations because at least 6% of startups go under because of a pivot from their original business model.
If your planning structure is solid, it should keep the company afloat despite changes in customer preferences and demand, fluctuating market conditions, and various other risks. So, keep crunching the numbers and a close watch on the company’s metrics to ensure growth and stability.
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