How to make your financial planning successful
How to create a successful financial Plan
Often startup founders want to work on their product idea but ignore that their business needs to be profitable to sustain the development of their product. This means you need to understand how you are generating revenues and spending your money. A financial plan will help you to track your money and make it easier to convince investors.
Startup founders are often very fond of their business idea so they want to develop their product and only do that because they are so passionate about it. However, you need to be reasonable and realise that you need money to build your idea and make your business model profitable. The same applies to social impact startups who are determined to make this world a better place but do not like the idea of pursuing profitability. If you do not make your business self-sustaining, you will not be able to survive.
This is why you need to create a financial plan, also referred to as the “business plan”, the centerpiece of your startup idea. It tells you how much longer you can survive and if your business model will eventually become profitable. It lets you test different business models and you see how profitable they are so you can make the decision of which idea you can realistically pursue. Without a financial plan you will not be able to find investors who are willing to support your startup idea. They need to see that your idea can eventually become profitable.
Since establishing your own financial plan is a seemingly complicated endeavour, I have created the Financial Plan Tomatosheet so you do not have any excuses anymore not to have a financial plan.
This Tomatosheet is an Excel spreadsheet which provides you with a template of a financial plan. It tells you which numbers you need to calculate your cash flow and it tracks other crucial indicators ensuring the survival of your startup.
The financial plan
helps you to
To benefit from the purposes, it is important to go about the financial plan the right way.
The financial plan
fulfills the purpose of
how to approach the financial plan
Your time is very well invested to establish your financial plan because it fulfills important functions.
In this sheet the timeline is mapped horizontally. Row 4 displays the year and row 5 the months. The vertical tells you for each cell what you need to fill in or what is calculated. Each number reflects the status of the indicators at the end of each month.
The financial plan has 5 parts:
- Part one, the input section, is all about salaries, revenues and investments/liabilities. The revenues are an important part and they are the hardest part to create. The generation of this part defines exactly what your business model is. It is usually created by multiplying an anticipated number of sold products with a unit price.
- The second part then calculates statistics from the first part, returning expenses and earnings in total.
- The third part, calculates the most important indicator: the difference between the expenses and the earnings, also often referred to as the cash flow which are incoming and outgoing payments. This is the conclusion out of your financial plan.
- The fourth part is a complement to the liquidity controlling for misleading assumptions which are too positive or too negative assumptions. It calculates other statistics complementing the cash flow to gain an overall impression of how your business model is developing. For example, the number of salespeople in relation to the product developers are important to observe so your business does not lose its balance. If you have too many salespeople per product developer then you cannot satisfy your customers anymore.
- The fifth and last section measures your social and ecological impact. These indicators are as important as your cash flow measuring if you are accomplishing your mission of solving social and ecological challenges.
How to use this tomatosheet
1. Inputs Section
In this section you estimate your evolving salary costs and expected revenues.
- Under the title ‘Employees’ you fill in the salaries you are expecting to pay to different categories of employees (yellow). In Column B you state the category: management, cross-functional, product development and sales and marketing (orange). Since startups do not have that many employees, you do not necessarily need more categories. In column C you fill in for each category of employees the monthly salary for one employee of this category (light green). For each month you write down the number of employees you anticipate during one month in this category (dark green).
- Under the title ‘Revenue’ you estimate the revenue you will generate with your products (purple). In column B you write down the name of your product(s) (pink) and in column C the price per unit you are selling it for (light blue). Then you estimate for each month how many units you will sell of the respective products (dark blue). Additionally, you can fill in under ‘Revenue’ if you are winning a grant or receiving other subsidies.
The generation of this part defines exactly what your business model is.
- Further, investments and liabilities are recorded in the third sub-section of the ‘Input’ section (red).
2. Calculations Section
This section draws from the top section, the ‘Inputs’.
- Under ‘Expenses’ you have different kinds of expenses (yellow). ‘Salaries’ are calculated based on the information provided in the ‘Inputs’ section on the salaries of the different employee categories (red arrow). The rest of the expenses are calculated as a percentage of the ‘Salaries’ expenses and are written down in column C for each type of expenses (green). This percentage is estimated by yourself based on your experience or after checking different options and how they affect the liquidity.
- Under ‘Earnings’ the revenues generated by your product(s) of the top section are summed up (red arrow) and the revenues of grants and subsidies are added (purple).
3. Summary Section
This section summarizes the upper two sections by calculating your liquidity, i.e. how much money you can spend. It does so by calculating the income, the amount of taxes you need to pay and adding up investments/liabilities.
- Since startups almost do not pay taxes you calculate first the income, which is the difference between revenue and expenses. Total revenue and expenses are drawn from the ‘Calculations’ section (red arrows).
- The amount of taxes is calculated as a share of the income. The share of taxes is noted down column C next to ‘Taxes’ (green) and in column D your taxes are calculated.
4. Analytics Section
In this section you calculate complementing indicators to your cash flow.
There are more indicators regarding your employees than what they cost. You track the development of the salaries, the number of employees, product developers per salesperson and percent of cross functional employees. All of them show you if your financial plan is balanced (yellow).
Further 4 indicators providing another view on your expenses are the ‘monthly burn rate’, ‘liquidity / monthly burn rate’, ‘cost of goods sold’ and the ‘expense ratio’ (green).
- The monthly burn rate is a must for every founder to memorise because it tells you how much money per month you are spending.
- The liquidity / monthly burn rate tells you how many months you still have and its size must always be bigger than 2.
- Investors are focused on the cost of goods sold because it tells you how much money you need to spend per unit sold or per client. It is also an important number for price negotiations with your clients because you need to know your minimum price to cover your costs.
- The expense ratio is the relation expenses/revenues. It is at the beginning not that important because most likely there will not be any revenues, which means the ratio is always higher than 100%. If you reach 100% your revenues cover your expenses exactly and your business is becoming slowly profitable. If you reach below 100% it means that you are profitable and you can keep money to reinvest. This is also an important indicator for investors to show the development of your profitability.
5. Impact Section
Here you calculate other indicators than the economic ones. You want to measure your ecological and social impact. You can use these indicators especially if you want to apply for grants and subsidies.
Build the backbone of your startup with the Financial Plan Tomatosheet. Start by
Other Tomatosheets serve as complements to the Financial Plan, like the Project Pipeline or the Meeting Cockpit. They help you to structure your startup by guiding you how to set up a project plan or a meeting agenda. Read here more on their importance and how you can use them.
THE 5 FINANCIAL PLAN PRINCIPLES
- It is a must for every startup.
- Your business needs to become profitable to survive – no money, no business.
- Needs to be established from day one.
- Update your numbers monthly.
- Discuss your assumptions with your team.
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