Launching a business is messy, demanding organisation across numerous areas. Yet, finances require a focused approach. Building a financial plan empowers investors, you, and your team with a clear strategy for managing your startup's money, reaching goals, and securing long-term growth. This plan outlines revenue and spending forecasts (financial projections) to demonstrate viability and attract potential investors (angel investors, etc.). A well-crafted plan also helps manage cash flow (cash flow statement startups), a crucial factor for any young business.

In this post, we’ll cover the following -

1. What is a financial plan

2. Pros and Cons

3. Financial Plan Activities

4. What you would need for a Startup Financial Plan

5. How to create a Financial Plan?

What is a financial Plan?

Creating a financial plan for your startup, especially if it's a SaaS business, means putting together a clear document that talks about the money side of things. This document covers how much money your business has, what you want to achieve in the future, the steps you'll take to get there, and how much all of this might cost.

To make this plan, you'll gather information and make educated guesses about things like how much money you'll make, how much you'll spend, and other money-related stuff to predict where your business is headed financially.

Badly made financial plans is proven to be one of the biggest reasons a startup fails as this CNBC study reports that 44% of startups failed due to running out of cash in 2022.

Pros and Cons

Pros

Clarity and Direction: Your business will have a clear roadmap for your financial goals and how you can achieve them.

Risk Management: You will understand the potential financial risks and challenges, helping you develop strategies to mitigate them. Helping you prepare for unexpected expenses or downturns in the market, reducing the impact on your business.

Monitoring and Control: A financial plan can be used as a base to monitor your business’s financial performance. You can compare your actual results with your Financial Plan and make adjustments to stay on track.

Long-term Success: You overall increase the likelihood of your business succeeding in the long-term. It helps you build a strong foundation for growth and sustainability, positioning your business for future opportunities.

Investors and Financing: Investors LOVE to see a well-developed financial plan, this means you understand numbers, understand how things can impact your business, and will show your potential for profitability.

Cons

Resource intensive: Developing a detailed financial plan requires a lot of time, effort, and sometimes specialised expertise.

Rigidity vs Adaptability: Investors LOVE to see a well-developed financial plan, this means you understand numbers, understand how things can impact your business, and will show your potential for profitability.

False Security: Relying too much on a financial plan can create a false sense of security. Businesses can become complacent and unintentionally ignore external factors or fail to adjust their strategies in response to changes in the market or competitive landscape.

Financial plans are super helpful for businesses. They offer lots of benefits, like helping you see where you're headed financially and preparing for any bumps in the road. They can take up a lot of time and might seem inflexible at times, but as long as you don't rely on them too much, they're a great tool for success. So, if you balance things right and don't just focus on the financial plan, your business is set up for success!

Financial Plan activities

A financial plan is made up of several smaller activities:

• Making a plan for hiring: Figuring out how many people you will need to hire, what roles they will have, and what skills will be needed from each role. You’ll also have to decide when you will bring them on board to help meet your business goals and keeping your costs in check.

• Making projections: Figuring out how many people you will need to hire, what roles they will have, and what skills will be needed from each role. You’ll also have to decide when you will bring them on board to help meet your business goals and keeping your costs in check.

• Analysing Projections: Figuring out how many people you will need to hire, what roles they will have, and what skills will be needed from each role. You’ll also have to decide when you will bring them on board to help meet your business goals and keeping your costs in check.

• Profit and Loss Statement (P&L): These statements sum up your business’s income and expenses over a specific period. They give you a clear picture of whether your business is making or losing money and how healthy its finances are.

• Creating Annual Growth Strategies: This step is all about setting goals for growing your business in terms of revenue, market reach, product development, or cost-saving measures. You’ll outline the steps needed to achieve these goals and keep your business moving forward.

What you would need for a Startup Financial Plan

P&L Statements

Also known as an income statement is a financial report summarises the company’s revenues, expenses, and profits (or losses) over a specific period. Such as:

• Revenue: Total amount of money earned from selling goods or services.

• Expenses: Costs generated from the company like salaries, rent, utilities, advertisements, etc..

• Gross Profit: Revenue minus the cost of goods sold (COGS). This shows the profit before deducting operating expenses.

• Operating Expenses: Costs related to the day-to-day operations of the business, such as salaries, rent, utilities, and marketing expenses.

• Operating Income: Gross profit minus operating expenses. It reflects the profit generated from the core business activities.

• Non-Operating Income and Expenses: Additional income or expenses not directly related to the primary business operations, such as interest income or expenses from investments.

• Non-Operating Income and Expenses: Additional income or expenses not directly related to the primary business operations, such as interest income or expenses from investments.

Cash Flow Statement

A cash flow statement is a summary of the cash inflows and outflows from a company’s operating, investing, and financing activities, over a specific period. A cash flow statement typically includes:

• Operating Activities: Showing the cash generated or used by a company’s primary business operations. This includes cash receipts from sales, interest, and dividends, and cash payments (like salaries, rent, utilities, and taxes).

• Investing Activities: This outlines cash flows related to the purchases and sale of long-term assets (like property, equipment, and investments). Cash inflows may come from selling assets, while cash outflows may occur from purchasing new assets or investing securities.

• Financing Activities: This involves things like issuing or repurchasing stock, borrowing or repaying loans, and paying dividends. Cash inflows can come from issuing stock or borrowing money, while cash outflows may occur from repurchasing stock, repaying loans, or paying dividends.

Balance Sheet

This is a financial statement that shows a snapshot of a company’s financial position at a specific position (typically at the end of a reporting period, like a quarter). This shows a summary of a company’s assets, liabilities, and shareholders’ equity.

• Assets: This includes all the things the company owns or controls and can be used to generate future economic benefit. The balance sheet is separated into current assets (currently expected to be converted into cash or used up within one year) and non-current assets (expected to provide benefits after one year). Such as, cash, account receivable, inventory, property, plant, and equipment.

• Liabilities: This represents what the company owes to external parties. Liabilities is separated in the same as assets, current liabilities and non-current liabilities. Such as, payable, loans payable, and deferred revenue.

• Shareholders’ Equity: (Also known as owners’ equity or net worth) Shareholders’ Equity represents the residual interest in the company’s assets after deducting liabilities. This refers to the portion of the company’s assets that belongs to it’s shareholders. Shareholders’ equity is calculated as total assets minus total liabilities and this often includes components such as common stock, additional paid-in capital, retained earnings, and accumulated other comprehensive income.

Break-even Analysis

A break even analysis is used to determine the point when a company’s total revenues equal its total expenses. You can use a graph like this:

Finding the Break-even Point

• Fixed Costs: These are expenses that are constant regardless of the amount of production or sales. Such as, rent, salaries, utilities, and insurance.

• Variable Costs: These vary with the level of production or sales. Such as, raw materials, direct labour, and sales commissions.

• Contribution Margin: This the Total sales revenue minus total variable costs. This represents the amount of revenue that contributes to covering fixed costs and generating profit.

Formulas for Break-even Point

How to create a Financial Plan?

1. Understand your Financial Needs

1. Assess your current financial situation: Stock of your business’s income, expenses, assets, and liabilities. Also, make sure to understand your cash flow, profitability, and outstanding debts.

2. Identify areas for improvement: Look for opportunities to optimise your finances, such as reducing unnecessary expenses, increasing revenue streams, or improving cash flow management.

3. Look into your long-term financial objectives: Think about where you want your business to be financially in the future and what steps you need to take to get there.

By implementing these measures, you'll be able to focus on key operational activities effectively, be able to optimise your spending, and have long-term growth by ensuring your business is both viable and sustainable.

2. Define Your Financial Goals

1. Determine your objectives: Define what you want your business to achieve with your financial plan (KPIs). Such as, increasing profitability, expanding your business, reducing debt, or saving for specific investments.

2. SMART: You must hear this a lot but SMART is always important. BE:

S- Specific

SM - Measurable

SMA - Achievable

SMAR - Relevant

SMART - Time-Bound

3. Choose the Right Financial Tool to help you

1. Make sure to evaluate your options: Research different financial planning tools. You need to consider your needs, budget, and technical proficiency, such as, Obsidian!

Obsidian helps you become aware of how you are financially doing. Understand your cash in bank, Revenue, Transactions, Cash flow, and more! Here’s a sneak peek:

Sneak peek of Obsidian

Book a demo with us!

4. Make Assumptions Before Projecting Financials

1. Analyse market trends: Research industry trends, economic forecasts, and competitive landscape to make an informed decision about your future business conditions.

2. Consider internal factors: Take into account factors specific to your business, such as pricing strategy, product demand, marketing, and operational efficiency.

3. Be conservative yet realistic: Be cautious when making assumptions and ensure they are grounded in reality, making sure they’re based on reliable data and analysis.

5. Look into both Financial Projections

Both revenue and expense projections are necessary for a financial plan that shows the company’s expected performance and helps strategic decision-making.

Revenue Projections

Revenue projections estimate the amount of money a business is expected to earn from its primary operations over a specific period, typically a quarter or a year. This provides insight into a company’s expected income and helps provide guide for financial planning, budgeting, and decision making.

Make sure to consider:

1. Past sales performance

2. Market demand

3. Pricing strategies

4. Customer behaviours

5. Competition

6. Economic conditions

Revenue projections can be broken down by product or service lines, customer segments, geographic regions, or sales channels to provide a detailed view of expected revenue sources.

Expense Projections

Expense projections estimate the anticipated costs and expenditures a business expects to get to support its operations over a specific period. This allows a business to plan and allocate its resources effectively, control costs, and ensure financial sustainability.

Types of Expenses:

1. Fixed Costs (rent, salaries, utilities, etc.)

2. Variable costs (materials, supplies, marketing expenses, etc.)

Make sure to consider:

1. Fixed Costs

2. Variable costs

3. Employee costs or payroll expenses

4. Operational expenses

5. Marketing and advertising expenses

6. Emergency fund

Expense Projections are typically used to make a basis for the budget, allowing businesses to allocate their resources properly and track actual expenses against planned expenditures.

Businesses are also able to compare projected expenses with actual expenses, in order to identify variances, analyse spending patterns, and make adjustments to their financial plans as needed to control costs and optimise resource allocation.

6. Sensitivity analysis

Once you have finished creating your financial projections, you need to test it using a sensitivity analysis. This means you will be assessing the impact of changes in the projections.

1. Identify Key Variables: Determine which assumptions or variables in your financial projections are most critical to your business, such as, sales volume, pricing, cost of goods sold, etc..

2. Define Scenarios: Create a selection of scenarios to use against your projections and calculate the impact of changes with your assumptions, such as assessing the best-case and worst-case scenarios or comparing the projections by a certain percentage.

3. Adjust Assumptions: Change the values of the selected variables to reflect different market conditions, economic scenarios, or business outcomes. For example, you can increase sales volume by 10% or decrease production costs by 5%.

4. Analyse the Results: Compare the financial outcomes with your adjustments. Identify any significant differences in key financial metrics like revenue, profitability, cash flow, and net income.

5. Conclusions: Draw conclusions based on the results of the sensitivity analysis. Identify potential risks, opportunities, and areas of vulnerability of your financial projections. Adjust your business strategies and financial plans based on these.

6. Document the Findings: Document the findings of your sensitivity analysis, including assumptions tested, the range of scenarios explored, and the resulting financial outcomes.

7. Build a Report

Create a report from your financial projections that shows a clear overview of your financial plan. Including things like:

1. Executive Summary: Summarising your report

2. Detailed Financial Statements: Present your revenue and expense projections, cash flow statements, etc.

3. Supporting Analysis: Include charts, graphs, ,and tables to show trends, support key insights, and more.

8. Monitor and Adjust Your Financial Plan

Make sure to regularly review your financial plan to track your progress and performance against your projections. Also assess the current market conditions and make changes if necessary.

Compare your actual results to your projections to identify any discrepancies or areas where adjustments are needed.

Conclusion

Making a financial plan is a very long and tedious, but EXTREMELY necessary for a business to survive.

It can be tiring constantly making financial plans and keeping up with them so make sure to use something like Obsidian to help you understand how your business is doing financially.