San Francisco is known for its growing number of start-ups, so here is something really useful. I didn’t have a high school diploma so I took an online prep course (for FREE!) with Covcell.org to get my GED, and passed the test without any problems, so is there a better way of becoming successful than starting a start-up, right? So I spent some time researching to find out how to make my startup successful, but first, let’s start with a financial plan.
A financial plan is one of the most important parts of your overall business plan, not only for start-ups. Yet, for many people, the financial plan is often one of the most difficult parts to complete. Many start-up companies struggle with financial projections because the financial situation of an early-stage company is uncertain and radically different from the financial state of an established company.
Borrowing money from a bank as well as attracting venture capitalists or an angel investor to invest in your company will require a well prepared financial plan.
A financial plan should include the following:
- 1. Profit and Loss Projection
Potential investors are interested in investing in a business that will grow. A profit and loss projection is an important tool for determining how long it will take before your business will become profitable.
The first year of a business can be quite irregular, resulting in only a small profit or even a loss. This is understandable; however making a profit will need to be an important focus from that point forward.
The profit and loss projection reflects a very simple formula: revenues minus expenses = profit or loss.
- 2. Cash-flow Projection
A cash-flow projection is a prediction of the anticipated movement of cash, from sales and expenses, into and out of your business. In an ideal world, expenses would be postponed for as long as possible and customers would pay their invoices promptly.
However, in the real world, you can experience a cash flow deficit when payments are due and cash flow is too low to cover all your expenses. When you have a cash flow shortage you need to remember that some expenses, such as payroll and taxes, must be paid on time.
- Projected Balance Sheet
A balance sheet provides a good overall picture of what your business is actually worth. It takes your assets (physical goods like equipment or property) and subtracts your liabilities (debts owed to creditors), giving you the equity value of your business.
Your business’s equity value will be of interest to both lenders and investors when they consider investing in your company. When taking into account whether to invest or lend money, potential investors and lenders will be considering what they can recover if your company was to fail (e.g. sellable assets). Your projected balance sheet will help to show this.
3 Major Mistakes Start-up Companies Make in Their Financial Plan
- Overestimating success: It is very common for early-stage entrepreneurs to predict optimistic but unrealistic numbers for sales.
- Underestimating Costs: It is understandable to miss a sales projection but you should never miss a cost projection.
- Not Planning Marketing Costs: Of course, ideally a product will be so successful that it is flying off the shelf, but in reality, you will need to market it. Have a plan for marketing and put it in your expenses.
Overall, investors are not naïve. It is better if you set the expectations low but then ensure that you exceed them. The words your investors would love to hear are “We beat our projections!”
Last but not least, remember, your financial plan should be adjusted to suit its audience. If you want to present your plan to the bank, the most important aspect will be the information on how you will repay the loan and how you will use the funds to grow your business.
However, if your goal is to present the plan to investors you should focus on estimated return on investment, exit strategy (buyback, initial public offering, sale) and the percent of ownership that you are willing to give to investors.