Startup Financial Planning

How to make a startup financial plan

Follow these steps to create a startup financial plan.

  1. Determine the goal of the plan

    Establish the plan’s goal so that you can decide how complicated to make the project. If you are raising capital, and the financial planning is part of the fundraising exercise, we suggest having enough detail to show that you understand the market and what it will take to reach important product milestones. If the model is overly detailed, your conversations with investors will get bogged down in minutiae. Finally, if your goal is to have a realistic cash flow model for an operating business, it is typical to have very detailed analysis.

  2. Set your business' KPIs

    Usually, there are three to four, maybe five, KPIs you want to use to really drive your business. Understanding - and organizing - your KPIs helps you prepare to organize your key assumptions and outputs. Use industry standard KPIs as a starting point. And make sure you can track and report on these KPIs. 

  3. Get a template

    Find an existing financial planning template that matches your business model. Existing templates almost ALWAYS make sense. Building a working spreadsheet is time consuming and a waste of time. Use one of the many free templates - like the free templates that we’ve published on our financial modeling page.

  4. Use your actual results as the starting point

    Merge your actual results into your projections. This helps you level set your projections against reality. The first month in your projected financial plan should not have any big “jumps” from the historical numbers, unless there is a legitimate reason. Issues we’ve seen is where a projection has an immediate increase in revenue, headcount, etc. These mistakes can make your plan useless. It’s best to start with reality.

  5. Start forecasting revenue

    Work your way down the income statement, starting with revenue. When you think about how much revenue you’ll have, make sure you understand what’s driving that revenue. You’ll also want to think about your cost of goods sold as you project your revenue. Note that this does NOT make sense if you are planning a pre-revenue hardware or biotech company with a long time to revenue. Instead, for those, map out the effort you’ll need to reach critical product development milestones.

  6. Estimate headcount numbers

    Headcount is typically the most expensive cost for an early-stage company. Who you are hiring, when you are hiring them and how much they will cost is a very important step in startup financial planning.

  7. Plan for other expenses

    There are several good tactics for projecting other expenses. One is to look at current expenses, and forecast out how they grow. However, a better one is to understand how other, similar companies (ones with similar business models) have grown over time. Remember to add in additional expenses as the company grows. Very few companies have over a 50% pre-tax profit margin, so make sure you are adding in expenses!

  8. Develop a working capital plan

    Not every startup will need to do this, but for companies with inventory, or delays in when they are paid by clients, working capital can be a major use of cash. Be especially realistic about how long it takes large clients to pay invoices!

  9. Review your financial plan

    Take a hard look at your finished plan. Check to make sure your startup financial projections are realistic and match your vision for how the company will evolve, grow and use cash. It’s also a great idea to review it regularly, after every month or quarter. By reviewing your financial plan, you can identify trends and potential problems, and take corrective action as needed.

KPIs Income statement

A typical time to get your startup’s financial plan together is at the end of the year, in preparation for the following year. You really want to focus your energy to get into the new year as set up as possible, knowing exactly what you need to do to execute. And it really helps to get that financial model or financial plan set up. This is when Kruze Consulting comes to the rescue with free financial model downloads and advice, to make your startup’s financial planning easier and faster.

However, 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. So if you haven’t already made a financial plan for your startup, or if you are looking to reduce your burn, extend your cash runway or just carefully manage your expenses during a possible recession, there is no time better than right now!

How to do Financial Planning for Your Startup

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.

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.

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.

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.