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

Having finances under control is the key to a start-up'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. Inadequate financial planning is one of the most common reasons why companies fail. To avoid this, financial planning should be at the center of the business planning phase.

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What is a financial plan for start-ups?

Financial planning for a start-up is about setting a roadmap for the financial success of the company. Financial performance is forecast based on the following key figures:

• spending
• Expected income
• profit margins
• Expected profit
• Break-even
• cash flow

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

 
Two approaches to financial planning

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

Top-down forecast

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This method is usually 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 entire target market (TAM) in the currency in which the company operates.

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

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

The forecast revenue is calculated as follows:

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

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Bottom-up forecast

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In contrast to top-down forecasting, bottom-up forecasting uses micro-level data to determine revenue for a specific period of time. This means that the order figures and the sales expected by customers are calculated in order to obtain a more accurate estimate of the turnover. Basically, you start from scratch and calculate how much you could earn in a year or a specific period of time.

The bottom-up forecast is particularly suitable for newly founded companies, as it gives a clearer picture of how certain indicators affect sales. This type of analysis enables entrepreneurs to determine the direct impact of their activity on the financial situation.

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

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What belongs in a financial plan?

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

• Income: Units sold x average price - expenditure and production costs
• Cost of goods sold: initial inventory + purchase — final inventory
• Operating costs: office rent + marketing costs + labor costs + etc.
• personnel costs
• Capital expenditure on investments
• corporate financing

What are the results of a financial plan?

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

Financial statements

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 predicting the value of the company.

Cash flow overview

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

Based on this overview, it is then possible to understand how each of these areas increases or hinders the company's profitability.

Insights into relevant KPIs

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KPIs (Key Performance Indicators) are quantifiable measures of performance over a specific period of time. Companies usually break down KPIs into quarterly goals so that KPIs can develop in line with performance.

 
Findings

• Financial planning is a roadmap for a company's financial success.
• Good financial planning can increase confidence in the idea, build up savings and attract investors.
• Top-down forecasting is a method of financial planning that is more suitable for larger companies, while the bottom-up method is more suitable for start-ups.
• The financial plan specifies the goals that are being pursued for the company.
• When your financial plan is completed, an accurate balance sheet, an overview of cash flow, and further insights into KPIs will be the reward.

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