Introduction
Creating a financial plan for your startup is one of the most important steps you can take on the road to securing a successful seed or angel investment. But what exactly is a financial plan and why is it so important?
A financial plan is a document drawn up by founders and their team to outline the current and projected future financial position of the startup. It includes figures and data about the company’s current and forecasted revenue, costs and expenses, upcoming fundraising rounds and projections for milestones such as profit and return on investment.
The reasons why a financial plan is so important all revolve around investor perception within the investment community. Investors want to get a comprehensive understanding of the financials of the business they’re considering investing in, and having a clear, well-thought-out and comprehensive financial plan can help communicate the startup’s current and projected financial standing to potential investors.
Key Takeaways:
- Financial plans are an essential tool for startups seeking to attract investors.
- A financial plan outlines the startup’s current and projected financial position.
- Having a comprehensive financial plan can help communicate the startup’s current and projected financial standing to potential investors.
- Elements to consider when crafting a financial plan include current and forecasted revenue, costs, expenses, and anticipated fundraising rounds.
How to Create a Financial Plan
Creating a financial plan is an important step for any startup looking to secure investment. Knowing what your financial goals are and having a realistic plan on how to reach them will make it easier to seek out potential investors and negotiate with them. Here's how you can create a financial plan and make sure your startup is ready to attract investors.
Understand Your Current Financial Situation
It's important to start by understanding your current financial situation and getting an overview of where you're starting from. This information can include the amount of money you have to invest in the startup yourself, the liabilities you might have, and the assets you can leverage. Having a clear financial picture of how much capital you need and how you plan to use it will help you set realistic goals and make a strong financial plan.
Set Financial Goals
Once you have a good understanding of your current financial situation, it's time for you to set financial goals for your startup. This will depend on the kind of investment you need and the goals that you have for your business. Make sure to factor in the cost of running the business, any capital you might need for product or service development, the amount of money you need to cover liabilities, and any money you might need for marketing costs.
Try to Be Realistic with Your Goals
When setting your financial goals, make sure to be realistic in your expectations. Investors look for startups that have a clear vision and realistic plans that they can understand and support. Making overly optimistic goals and plans will not only make it more difficult to find investors, but it could also result in a strained relationship with them down the line.
Monitor Your Progress
Once your financial plan is in place, make sure to monitor your progress on a regular basis. Keeping track of how close you are to achieving your goals and understanding any new developments in the market will help you have a better understanding of where you need to go. The more data you can collect and analyze, the better your financial plan will be and the more attractive you will be for potential investors.
Adjust Your Plan
Creating an effective financial plan to secure investment is only part of the process when launching a startup. It is critical to constantly be aware of changes in the investments and the market, adjust, and stay ahead of the competition. Here are a few tips on how to adjust your financial plan to keep it up-to-date and secure the right investment.
Monitor Changes in the Investments
Stay current on changes that occur within investment firms and organizations. These changes may influence their policies, funding protocols, and other operation factors that can affect your startup's ability to secure an investment. Make sure to register for notifications from investment organizations directly so you can stay up to date on any updates.
Track Changes in the Market and Your Field
Pay attention to changes that impact the markets and industries that you operate in. Keeping a strong understanding of how changes in consumer action, international regulations, and economic trends can affect your business can help you stay agile in your financial planning. Additionally, pay attention to new competitors, changes in market demands, and consumer sentiment so you can give yourself a competitive edge.
Make Adjustments if Needed
When necessary, make changes to your financial plan to reflect changes in the market and investments. Not every change that you observe will require an extensive update of your plan, but be sure to adjust the important factors, like the return on investment, projected cash flow, and anticipated growth. Additionally, if your business model needs to shift in accordance to market trends, you should make sure to document those changes in your financial plan.
Gained Funds and Utilization
After acquiring the necessary funds to invest in your startup, it is essential to know how to properly utilize them. Following four steps can help you do that:
Track the funds you acquired
Have your accountant keep track of where the funds are coming from and going. Knowing how much money you have, how much is getting invested, and where it is going is essential in managing your funds and growing your business.
Use accounting software to keep things organized
A comprehensive accounting software will help you keep your finances organized and ensure that your money is able to work for your startup in a productive way. With proper accounting, you will have access to current information on your financial health, which is essential in making sound decisions when investing.
Utilize your funds to grow your business
Use your funds to invest in ways that will grow and develop your startup, such as hiring key personnel, updating your technology, or expanding into new markets. Your startup requires resources to grow, so make sure your investments are aimed towards this purpose.
- Invest in tools, technologies, and services that will help you grow.
- Focus on paying down debt.
- Seek out capital investments with strategic partners.
Discuss With Professional Advisers
When creating a financial plan to secure investment for your startup, it is important to consider partnering with professional financial advisors and advisers. Professional advisers can be of great assistance in helping you to create the most efficient and successful plan in order to best secure investment.
It is important to consider talking to financial advisors and other relevant professionals, such as lawyers and accountants, who specialize in, or have experience with, the business venture you are working on. Professional advisors can be aware of particular laws, principles and regulations that you may not be aware of, and they can guide and advise you so that you make informed decisions to ensure that your plans are secure and smooth-running.
Professionals in the domain of finance and investment, such as venture capitalists, can also offer a useful understanding of the strategies needed to best secure outside investments for your startup. Additionally, financial or venture capital advisors or groups can help in creating a plan to secure the investments that are needed for your business.
It is essential to ask relevant questions to the financial advisors you intend to work with, so that you can judge the credibility and suitability of their advice for your company. Furthermore, having the assistance of experienced financial professionals by your side can provide a greater level of comfort when creating a plan and pursuing investors.
Track Your Success
Creating a financial plan is just the beginning. To really make sure your startup is a success, it's important to track your progress and measure it in relation to initial goals. Doing this helps with investment decisions and allows entrepreneurs to see their goals come to fruition.
Monitor Your Successes
It's essential to track the successes and failures of your business. Small wins or losses can add up over time and have a major effect on your overall financial position. Being able to recognize and act on these successes and losses is a key part of running a successful business. Keep track of all key metrics, such as customer numbers, number of sales, and profits.
Increase Investments or Cut Losses as Needed
Having clear metrics and goals allows you to make informed decisions about where to invest resources and where to cut losses. This can help you be more efficient with funds and maximize potential returns. By highlighting the areas that are working and those that need improvement, you can ensure the success of your business.
Consider Using a Tracking Software
For larger businesses or startups that are scaling, tracking can take on a whole new complexity. In this case, consider investing in tracking software or systems. There are many off-the-shelf tracking tools available that can provide insights and help you make informed decisions.
- Gather data from all sources, including customer communications, market surveys, and sales numbers.
- Organize data into actionable insights.
- Use technology to automate and speed up the process.
- Analyze data to identify trends and opportunities.
Conclusion
Creating a financial plan for your startup is essential to secure investment and manage resources in the best way possible. The process of creating a financial plan for a startup can seem daunting at first, however, breaking it down into the discussed steps makes it a more manageable and straightforward process. Here is a quick recap of the essential steps:
- Set long-term financial goals
- Create a budget and cash flow plan
- Understand and review legal conditions
- Calculate potential return on investment
- Finalize and register the business plan
- Check for sources of funding
- Seek legal and financial advice
Creating a financial plan for your startup is an important step that can help you secure funds from investors and efficiently manage resources over time. Additionally, as you execute your financial plan, it is important to stay informed about the legal and financial changes that might affect your business and adjust the plan as needed.