One of the most important planning and control instruments in startups is the financial plan – and not just from a financial point of view. Fueled by freely available capital (for instance, after closing a financing round), a startup without a reliable financial plan navigates blindly through the everyday entrepreneurial business. For the following reasons a reliable financial plan is of great importance.

Burn rate and runway

It is crucially important for a startup to be able to determine reliably one’s own burn rate and thereby one’s runway. The runway is generally defined as the time period for which the available capital of a startup lasts to meet all payment obligations – also future ones. Startups need to know their runway so as not to miss the moment when they have to take in fresh capital – debt or equity. But raising equity from venture capital investors takes time: the financing round needs to be prepared well and closed just in time to prevent the startup from running out of cash. The end of liquidity is the beginning of insolvency.

Financial planning and strategic management

The financial plan does not only make existential parameters controllable, is also very helpful as a strategic management tool. The financial plan schedules the amount of future deposits and withdrawals. This shows when there is financial scope for extensive investments or when assets should better not be touched.

The financial plan shows the impact of increase or decrease of deposits and withdrawals from the liquidity of startups as well as their impact on runway. In this way liquidity in startups can be effectively controlled and managed. To this end, a continuous and open communication with the founding team or CEO of startups is essential. Finally, not only the current but also the future strategy of startups needs to be translated into deposits and withdrawals as the essential part of a financial plan.

Elements of reliable financial planning

First and foremost, financial planning means juxtaposing the receipts and payments of a defined period (month, quarter or year). The difference between inflows and outflows of the selected period enables calculating the liquidity balance, which either leads to an increasing or decreasing of cash and cash equivalents (bank and cash on hand). So far, so good.

But to consider deposits and withdrawals and to include them all correctly for the right date in the financial plan has repeatedly shown to be a challenge in a startup’s everyday life. It can be fatal if, for example, deposits are projected too largely into the future, suggesting readily available cash in a full checkout, while that cash will de facto not be available.

Many startups have a hard time getting a grip on all their cash flows in a centralized way. Costs incur in all divisions across the company, which lead to payments that all need to be included in the financial planning. To this end, of course, the finance department must be aware of all those inflows and outflows in detail. This is hardly possible when all departments may trigger orders autonomously, or when invoices are sent out by e-mail in a decentralized way. Same goes for snail mail invoices to various departments that make it too late (or never) to the financial department. This happens even in smaller or medium-sized startups.

Speaking about money

A reliable financial planning requires a functioning culture of communication and an organizational structure, which both ensure that all relevant information go promptly and correctly to the finance department of the startup. Especially in startups that grow fast such structures need to be created or amended on the fly. Structured communication may be closer related to bureaucracy than to the hands-on spirit of entrepreneurs. But even ideas with a great market potential lead nowhere when the founders run out of cash and cannot continue their mission.

Example of common mistakes

Everyday startup life shows that it’s hard to keep track of all money inflows and outflows reliably. In terms of withdrawals this could be on the one hand sales tax and credit card bills on the other. In terms of deposits this main problem is often input tax. Without registering them, planning remains incomplete and may lead to a rude awakening.

Better hands-on than never

Our core message is: create and install a reliable financial plan for your startup. It may not be perfect from the start. But like so often in life: rather start with your sleeves rolled up than never. Only by trying hard you can reach near-perfect financial planning over time and thus create a functioning and indispensable management tool for your startup.

 

→ Need help with your financial planning?

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