Startup Financial Planning: Guide and Templates

Financial Planning for Startups: Introduction

There are several key moments when startups do financial planning - before founding, at a fund raise or at the end of the year. A typical time to get your startup’s financial plan together is at the end of the year, in preparation for the following year. Having a financial plan set up helps the founders understand what they need to do to execute. We have free financial model downloads and advice to make your startup’s financial planning easier and faster.

However, startups are dynamic - and markets change a lot. Given the recent market turmoil, as a leading CPA for startups, we are advising our clients to take another look at their startup’s financial plan. In a difficult market, where a recession is possibly on the horizon, a financial plan for your startup is even more important. There is no time better than right now! 

Guide on how to Do Financial Planning for Startups

The most important item that you need to have to put together a good financial plan for your startup is to have a vision of what your long-term strategy and goals are. You’ll want to bake your financial plan around what that particular vision is. The financial plan becomes the near-term roadmap of that vision. 

For some founders, this vision may be in the form of a pitch deck. For others, they may have a formal business plan and need to make a financial plan for that business plan. For founders without any written business plan or slide deck, the financial planning process is a perfectly fine way to put the vision onto “paper.” 

A note on financial plans for fundraising due diligence

One common mistake founders make is to treat the financial plan as just a minor request on the VC’s due diligence checklist. It’s not. Larger investors will have a team of analysts who dig into the projections; at smaller investors, the partner will be the person who analyzes and compares your financial plan against what you’ve presented in the pitch. For companies that are raising debt, the revenue projections and P&L statements will be used to drive underwriting decisions - so it’s something to be taken seriously.  

Startup Financial Planning Templates and Examples

We’ve published several free templates that you can use as examples and as the basis for your planning work. Visit our startup financial model page to access the free templates. We strongly advise founders to grab a template; building an excel file is a waste of time for most founders - this is a problem that we, and many other places on the internet, have already solved. Focus on the important parts of your plan (like your KPIs, which we’ll discuss next) and use a template’s spreadsheet plumbing.

Creating a comprehensive financial plan is essential for any startup aiming for long-term success and sustainability. A well-structured financial plan not only helps in securing funding but also provides a clear roadmap for growth and stability. The financial plan serves multiple purposes: it acts as a budget that informs different divisions within the organization of their projected hiring needs, major expenses, and financial goals; it also functions as a business plan that outlines near-term expenses and goals, illustrating the startup’s growth potential.

To develop a robust financial plan, startups need to focus on several key components. These components include detailed revenue projections, a thorough expense budget, headcount requirements and hiring plans, income statements, cash flow statements, balance sheets, capital requirements, and fundraising plans. Additionally, performing a break-even analysis, monitoring financial ratios and key performance indicators (KPIs), and conducting a risk analysis with mitigation strategies are crucial steps in ensuring financial health and preparedness for any challenges that may arise.

Key Components of a Startup Financial Plan

1. Revenue Projections
   • Sales Forecast: Estimate the number of units or services you expect to sell and at what price.

   • Revenue Streams: Identify different sources of income (e.g., product sales, service fees, subscription fees, licensing).

      

2. Expense Budget
   • Cost of Goods Sold: What does it cost to deliver or sell each unit? This will increase in line with growing revenue, although hopefully you experience economies of scale.  
   • Fixed Costs: Costs that remain constant regardless of business activity, such as rent, salaries, and insurance.
   • Variable Costs: Costs that fluctuate with business activity that aren’t directly tied to delivering the service, such as sales commissions and marketing costs. 

   • One-Time Expenses: Initial setup costs, such as equipment purchase, legal fees, and branding costs. Note that many startups have high legal bills, so don’t forget about these.

      

3. Headcount Requirements and Hiring
   • Current Team: Overview of existing team members and their roles.
   • Future Hiring Plans: Detailed plan for future hires, including roles, timing, and associated costs. Headcount is the most expensive line item of most startups that we work with (although AI companies are spending a ton on compute), so you’ll want to get this right.

   • Compensation and Benefits: Expected salaries, bonuses, and benefits for current and future employees.

      

4. Income Statement (Profit and Loss Statement)
   • Organizes Revenue and Costs: The Income Statement organizes your revenue and costs.  
   • Revenue: Total income from sales or services.
   • Cost of Goods Sold (COGS): Direct costs attributable to the production of the goods sold by the company.
   • Gross Profit: Revenue minus COGS.
   • Operating Expenses: Expenses required for running the business, excluding COGS.
   • Net Income: Gross profit minus operating expenses, taxes, and interest.

    

5. Cash Flow Statement
   • Note: Not all startups need a fully built out cash flow statement - understanding the company’s cash position and cash burn is the most important part of this. The cash flow statement is most important for companies that have inventory, are purchasing cap ex, etc. 
   • Cash Inflows: All sources of cash, including sales, loans, and investments.
   • Cash Outflows: All uses of cash, including operational expenses, debt repayments, and capital expenditures.

   • Net Cash Flow: Difference between cash inflows and outflows.

      

6. Balance Sheet (Cash Position at a Minimum)
   • Note: Again, getting the company’s cash position matters, so you may not need a fully build out balance sheet!
   • Assets: Everything the company owns, including cash, inventory, property, and equipment.
   • Cash Position: Current cash available and its adequacy to meet immediate and short-term obligations. Again, the most important part of the projected balance sheet.
   • Liabilities: Everything the company owes, including loans, accounts payable, and mortgages.

   • Equity: Any investments in the business, or for a company that has not yet raised capital the assets minus the liabilities.

      

7. Capital Requirements and Fundraising Plan
   •  Note: For companies that are going to raise VC funding, it’s helpful to show what the next round will look like. This gives VCs in the current round an idea of how much they will have to commit in the following round to maintain their ownership. 

   • Initial Capital Needs: Total amount of capital required to start the business.

      

8. KPIs (Many of these are SaaS oriented, every industry has its own KPIs)
   • Monthly Recurring Revenue (MRR): The predictable and recurring portion of a company’s revenue generated from subscription-based products or services.
   • Annual Recurring Revenue (ARR): The predictable and recurring portion of revenue generated from subscription-based products or services, calculated by multiplying the MRR by 12.
   • Average Revenue per User (ARPU): The average amount of revenue that a customer generates over their lifetime.
   • Annual Contract Value (ACV): The average annual value of a customer contract, calculated by dividing the total value of a contract by the number of years in the contract.
   • Bookings: The total value of new customer contracts signed during a given period of time.
   • Customer Count: The number of paying customers at the beginning and end of the month, including tracking live or active customers, seats, and customers by product or category.
   • Customer Churn Rate: The percentage of customers that stop using a company’s products or services over a given time period.

   • Operational Ratios: Evaluate the efficiency of business operations (e.g., inventory turnover).

      

9. Scenario Planning / Scenario Analysis
   • Best-Case Scenario: Optimistic projection assuming favorable market conditions and business performance. This scenario can help plan for rapid growth and scaling opportunities.
   • Worst-Case Scenario: Pessimistic projection considering potential challenges and setbacks, such as economic downturns or significant market shifts. This scenario helps in planning for risk mitigation and ensuring business continuity.
   • Most Likely Scenario: Realistic projection based on current market trends and business performance. This scenario serves as the primary plan for operational and financial management.
   • Note: Be careful if you are sharing plans with VCs; you don’t want to create such a pessimistic scenario that no one wants to invest. 

Planning Goals - an Example of Effective Startup Budgeting

One best practice that our VP of Financial Strategy always talks about is that the startup CEO (and CFO if you have one) need to dictate the financial terms of the projections. How much the company will burn and the revenue targets are the primary goals that the entire team needs to know before they can begin their planning. An example of where things can go wrong in the process is if the CEO asks the sales team how much they can produce and the marketing team what they want to do and the R&D team what they want to spend - adding all of these numbers up usually leaves a company burning way, way too much cash.

It’s much better to start with constraints, so that your go to market teams know how much they need to produce and how much they have to spend to do it. And instead of giving the R&D team a blank check, give them the amount the have to spend for the year to accomplish their goals. This way, the team will create a plan that is less likely to burn through too much cash or miss revenue targets. 

Key Performance Indicators (KPIs)

The first thing you want to do is to start, management should be getting together and discussing this and formulating it, but you really want to isolate your key assumptions. And a lot of people use key performance indicators, KPIs, to drive their financial model. Thus, you have certain KPIs like average selling price, number of customers, number of engineers on the development side, productivity per engineer, and so on.

Usually, there are three to four, maybe five, KPIs you want to use to really drive your business. And typically the KPIs will, some of them at least, drive your revenue. And so, most people start from the top and they go top-down. They use the KPIs to figure out what the revenue projections are going to be. And then they start thinking about how they need to support, or how they need to build the organization to support that revenue.

So you’re talking about salespeople, sales engineers, developers, engineers, people who are in operations like HR, recruiting, accounting, like Kruze. Most of the companies we work with are all relying on us on an outsourced basis. We recommend a three-year model. You want to work on a three-year plan, but you also want to really focus on just the upcoming year, because that’s where you have the most control and visibility.

However, all your stakeholders, your employees, your investors, they are all going to care what that three-year plan really looks like, because it’s the trajectory of the company. You’re going from $5 to $10 to $20 million in revenue, hypothetically, and there’s a lot of things that need to happen for a company to make that transition from $5 to $20 million in revenue. And so having that planned out, knowing where you’re going, really helps everyone involved. Your startup’s financial projections can help explain the vision of your growth, using numbers and assumptions.

Financial Plan for Hardware and Biotech Startups

Now, we talked a lot about people and headcount expenses, but we didn’t talk about some of the more CapEx heavy companies like biotech, manufacturing, or robotics. For those companies, you have to plan ahead on your capital expenditures. And so you really need to know how much equipment needs to be bought, or when it’s going to get delivered, even if any accessories are needed along with that equipment. Thus, planning for a hardware or biotech company, MedTech company, and a robotics company, is actually a lot harder than just a pure SaaS or consumer internet company.

This is why you really need to plan ahead on those purchases and want to build in some lag. Everyone knows that when you make that order for the CapEx equipment it’s probably going to run a couple of months late - especially in today’s supply chain challenged environment. And so, you really want to plan ahead, build in that buffer. So you don’t get stuck in a place where you cannot execute because you don’t have what is needed.

Furthermore, many hardware startups are purchasing inventory well ahead of time to make sure they have the inventory they need on hand to meet customer demand. Nothing is worse than winning a huge purchase order but not being able to fulfill due to supply chain issues! And this is another place where a financial plan for a startup can really come in handy - a good projection of the number of units that you’ll need to meet forecasted demand can help you right-size inventory purchases.

Should Fundraising be in your Financial Plan?

Another important part of your financial plan that you really want to think about, is fundraising. Typically startups raise money on an 18-month cycle, and some others every 12 months, or every 24 months. However, given the current VC market, many investors are recommending stretching the next fundraise out 3+ years.

As you look forward, you want to think about what milestones you need to hit so that you can go back to the VC market and raise money. And if you’re cashflow positive, That’s amazing! At Kruze, that’s how we run the business, but you want to know where you’re going and know what you need to do so that you can raise capital. And I think there are a couple of other sources of capital than just VCs. There are outside VCs, the easiest is the top-up from internal VCs. And normally venture capitalists don’t like to keep writing checks into the company without an outside lead, but they are getting more aggressive these days and they really want to get as much capital into their good companies as possible. So that’s a conversation you can have. If times are tough, they’re typically the only ones who are going to support you. So that’s a second conversation to have about a bridge loan with them.

The other external source is lenders. There’s a very big venture debt market. And there’s a lot of liquidity there, a lot of lenders looking to put money to work. Thus, if your company is doing well, then fundraising actually can be really, really easy because you go out to the debt markets and you get six months of the runway extension. And that way you know you’re going to be able to hit the milestones you planned in your financial model.

Now, we’ve talked about debt. I think the final thing on just the fundraising aspect is, you can ask your investors just point-blank to give you the honest truth. Are you fundable right now? I think that’s a really good exercise for startups to go through. And you know what? You may not like the answer you get a lot of times, but you’re getting that real-time data and check-in. And so that’s a good thing to end the board meeting with. And again, it’s not always good news for you, but at least you know where you stand.

Board Approval for your Budget

Now, let’s talk about board approval. Sometimes, the boards, even in the stock purchase agreement and investor rights agreements, will include that they have the right to approve the financial plan for the year. So you’re going to present that budget to the board.

Now, I like to get all this done in December if possible, maybe January. The reason for that is if you can get everything nailed down, the board approved in December, you’re going right into January. You’re collecting resumes already, you’re going to be interviewing and you can usually hire those people that you need by the end of January or February. If you’re getting this board deck and board presentation approved in January, it puts you on a month delay and that’s not a huge deal.

Most recruiting doesn’t really turn up until the end of January. But just earlier is better. You also need to build in some buffer time because you’re going to need to have some conversations with your board. I would not just present the plan like, “Wow. Here it is.” I would be having side conversations with them while you’re building it, checking in, making sure you are consistent with what their assumptions are. And it’s very common for board members to not approve the plan on first blush and send you back to the drawing board a little bit. And often, they just want to see a more aggressive plan because they’ve invested a lot of capital in this company. They want to see it produce big numbers and a big exit out of it. This is why they’re going to challenge you to be more aggressive.

Of course, in a difficult market like what we are currently experiencing, redoing your startup’s financial planning now is a smart move, and is one that can help you proactively get your investors to respect your management chops (and make you more likely to raise capital from existing investors during a downturn!).

When Should a Startup Begin a Financial Planning Exercise?

Because startups operate in dynamic industries and grow and change at breakneck paces, long-range planning may have to be done on a regular basis. The best startup at least evaluate their long-range strategy every six months. Ideally, for a budgeting process - especially one that will be approved by a board, a startup should evaluate it’s long-term strategy in early Q4. That provides enough time for the financial projections to be put in order. 

Bigger startups will have more moving parts and more department leaders who will need to get involved in the process. This means that the executives will have to get the strategic plan updated very early in Q4 to give the department leaders enough time to get their plans put together and to pull in input from their teams. 

Execution and Measurement

And then the final aspect of financial planning for a startup is really the execution, and comparing your results against your plan. And a lot of it is getting those orders in for CapEx, getting HR, getting recruiting ramped up, making the time in your schedule and team members’ schedules to actually do the interviewing and attract really good people. One of the big reasons I see our clients miss their numbers, if they do miss them, is because their plan was predicated on bringing a certain number of contributors, whether it’s developers or salespeople into the organization. And they’re just late hiring those people.

By default, they just end up missing their numbers by a quarter. Thus, the faster you can execute this plan, the faster you are going to get those people in the door and start making positive progress in 2021. Your valuation will also go up if you’re raising more money. You have more traction. You’ll have a happier team and you’ll have a happier board.

But most importantly, you’ll have a happier you and a happier executive team of your startup.

To sum up, please, don’t wait, don’t procrastinate! Get that financial plan done. You’ll sleep better.