Founding a success: What belongs in the financial plan of a start-up?

Managing finances is key to a startup's success. Young entrepreneurs often want to start day-to-day business as quickly as possible, which means that too many start-ups are founded without prior planning. Marketing, growth and goals should be considered and defined in advance, and the start-up phase should also be carefully planned. Poor financial planning is one of the most common reasons for business failure. To avoid this, financial planning should be the focus of the business planning phase.

What is a startup financial plan?

Financial planning for a start-up is creating a roadmap for the financial success of the company. Financial success is forecasted based on the following key figures:

- Expenditure

- Expected income

- Profit margins

- Expected profit

- Break even

- Cash flow

It is often not possible to include all of this information in the initial plan simply because it is not yet known. The financial plan is not a static document. It will change and adapt as the company grows and takes shape.

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Two approaches to financial planning

There are two different approaches to creating a financial plan. We now explain both variants.

Top-down forecast

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This method is typically chosen by larger companies rather than start-ups, mostly in established industries where a lot of data is available. In this variant, the macroeconomic data of the market in which the company operates is analyzed by first determining the size of the total Addressable Market (TAM) in the currency in which the company operates.

Entrepreneurs who make top-down forecasts calculate their expected earnings in this way. However, this method is particularly suitable for larger companies that are entering existing markets and are figuring out how to assert themselves there.

Entrepreneurs should therefore ask themselves whether this type of forecast estimate makes sense for the size of their company and whether such a market forecast is at all within the scope of the company's operational possibilities.

The forecast revenue is calculated as follows:

Revenue = TAM size (CHF) x market share (%)

Bottom-up forecast

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Unlike top-down forecasting, bottom-up forecasting uses micro-level data to determine sales for a specific time period. This means that order counts and expected sales from customers are calculated to provide a more accurate estimate of sales. Basically, you start from scratch and calculate how much you could make in a year or a given period.

Bottom-up forecasting is particularly useful for start-ups as it gives a clearer picture of how certain indicators are affecting sales. This type of analysis allows entrepreneurs to determine the direct impact of their activity on the financial situation.

A combination of both methods is best. Because a thorough analysis is particularly attractive for investors.

What goes in a financial plan?

The following components belong in a start-up’s financial plan:

- Income: units sold x average price - expenses and production costs

- Cost of goods sold: opening inventory + purchases – ending inventory

- Operating costs: office rent + marketing costs + labor costs + etc.

- Personnel costs

- Capital expenditures for investments

- corporate finance

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What are the results of a financial plan?

A careful and well-calculated financial plan provides information about the health of a company. The following indicators can be read from this:

Annual Accounts

Financial statements are used by analysts to obtain information about a company's financial activities and performance. They are crucial when it comes to attracting investors, being audited and forecasting the value of the company.

Cash flow overview

The cash flow statement provides information on how much money the company has earned in a given period of time. The overview is usually divided into the categories of operating activities, investments and financing activities.

This overview can then be used to understand how each of these areas increases or hinders the profitability of the company.

Insights into relevant KPIs

KPIs (Key Performance Indicators) are quantifiable measures of performance over a specific period of time. Organizations typically break down the KPIs into quarterly targets so that the KPIs can evolve according to performance.

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Findings

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• Financial planning is a road map for a company's financial success.

• Good financial planning can increase confidence in the idea, build savings and attract investors.

• Top-down forecasting is a financial planning method more suited to larger companies, while bottom-up method is better suited to start-ups.

• The financial plan specifies the goals that the company is aiming for.

• When your financial plan is complete, an accurate balance sheet, cash flow overview and further insight into KPIs will be the reward.

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