1 June 2021 | Startup

7 Financial Planning Tips for Startups

If you fail to plan, you plan to fail.

That old adage really rings true when it comes to financial planning for startups.

One of the biggest mistakes you can make as a founder is trying to “wing it” with your finances. Taking the time to create a financial plan will:

Trust us, the value you’ll get from financial planning is well worth the time you put into it. But it’s only as valuable as you make it.

In this guide we’re going to show you how to take your startup’s financial plan from being a boring static document and turn it into your new favorite growth tool.

What is Financial Planning?

A financial plan is like a financial game plan for your startup. It outlines your company’s current financial state, your goals for the future, the actions you’ll take to reach those goals, and how much it’s going to cost.

Financial planning is the process of putting your “game plan” together and documenting it. Using data, you make assumptions about revenue, expenses, and other financial parts of your business to forecast the financial trajectory of your business.

A lot of startups document their plan in a spreadsheet, but we prefer software 😉. We’ll dive into why and how in a little bit.

Why is Financial Planning Important for Startups?

It costs money to grow a business, and most people don’t have unlimited resources. If you don’t plan for how you’re going to grow and how much it’s going to cost, you can easily waste your two most precious resources—time and money.

On top of that, if you plan on pitching investors, they’re going to expect to see a financial plan. They need to know that once they give you hundreds of thousands or millions of dollars to grow your startup, you have a plan for exactly how you’re going to use the money.

Essentially, financial planning forces you to think strategically about how to best use your resources and what your expected results are. Throughout the process, you’ll have to answer questions like:

By answering these types of questions with data and numbers and turning it into a financial plan, you’ll have a clearer picture of what growth looks like, how much it’ll cost, and how to measure success.

If you want to build your financial plan quicker, (and with more accuracy), I highly recommend giving Finmark a try. It’s much easier than using a spreadsheet, especially for founders.

revenue projections - startup financial planning

7 Financial Planning Tips for Startups

Now that you know what financial planning is and why startups need to do it, let’s take a look at some tips to make sure you’re creating the best financial plan possible.

1. Plan For Multiple Scenarios

In an ideal world, your revenue would always trend upward, unexpected expenses would never pop up, and everything would just fall into place.

But as any founder will tell you, that’s rarely the case.

The thing is, nobody hopes for the worst-case scenario for their business. But if you plan for it in advance, you’ll be better prepared to maneuver through it if it happens.

That’s why we recommend creating downside, upside, and baseline scenarios when you’re doing your financial planning. Each scenario has different assumptions for how your business will grow, so you’re more prepared for whatever happens.

multiple financial plans

Your baseline plan has the expectation that your business will grow at a steady rate. Your assumptions while building this plan might include:

A baseline financial plan is important because it gives you a benchmark. Since it’s primarily based on how your company has performed historically, it’ll be a good indicator of whether or not you’re trending up or down.

Your upside plan is your best case scenario, where your expectation is to outpace your baseline. Some assumptions you might make are:

Be careful with your upside plan though. If you’re going to make these types of assumptions, they need to be tied to actions.

For instance, you need to have a plan for how you’re going to get more customers, how you’re going to decrease churn, where new revenue will come from, etc.

Just changing your churn rate from 10% to 4% in your financial plan without a strategy for how you’re going to get there isn’t “planning”, it’s guessing.

Your downside plan is going to be the least enjoyable to create, but you’ll thank yourself for doing it. This is the plan with built-in expectations that you’ll see a decline from your baseline plan. It could include assumptions like:

The advice I gave you for your upside plan also applies to your downside plan. Your assumptions need to be tied to an event or action of some kind.

For example, maybe you plan on trying some new customer acquisition channels and you’re unsure of how they’ll perform so you estimate a higher CAC or lower conversions.

Or maybe your revenue growth has been on a slow decline for a few months, so you plan for what happens if that trend continues or speeds up.

What you don’t want to do is make assumptions like “our revenue will decrease 10%” without having any data or reasoning to justify why that would happen.

Essentially, your downside financial plan should have a little bit of skepticism, not pessimism. The difference is skepticism means having some doubt, while pessimism is assuming the worst will happen.

Learn more about how to do scenario analysis here 👇

How to Do Scenario Analysis: Step-By-Step Guide

2. Ask “What if”

Sometimes founders and financial folks tend to look at financial planning as a means to an end. You enter in a few numbers to get a final “report” on where your financial will be in the future.

This usually happens because you’re financial planning for a specific event—fundraising, investor meetings, preparing for the new year, etc.

Instead, I want to challenge you to take a new perspective when you’re building your startup’s financial plan. Use it as an opportunity to ask “what if” questions and see how it’ll impact your financial projections.

Remember what I said about tying your assumptions to actions? This is when you can brainstorm on what those actions are.

For example, you might ask:

Since you’re financial planning, try to make your “what if” questions quantifiable, and ideally something with a monetary value attached to it. That way, you can build it into your financial plan and see how it affects your projections.

3. Your Expenses Won’t Stay Flat

A common mistake founders make with financial planning is assuming expenses will stay flat over time. If your company is growing, more than likely, so will your expenses.

There’s a big misconception that higher expenses are a bad thing. Yes, rising expenses can be bad—if you’re spending money on unnecessary things. But think about some of the most common expenses that come with growth:

Generally, these expenses will all grow as your company gets bigger.

One of the most common examples is with customer support. The more customers you get, the more questions, bugs, and support tickets you’ll have.

So at some point, you’ll need to bring on new support people to handle the volume. Otherwise you risk losing customers (and revenue) because 58% of consumers will switch companies because of poor customer service.

If you’re using Finmark, you can account for these types of changes when you add expenses into your financial plan. Here’s how.

Let’s take rent for example. If your rent is currently $3,000 per month, but you expect that amount to increase 2% annually from rent increases, you can build that into your financial plan with Finmark.

expense increase - financial plan

Including these expense increases in your financial plan make your data more accurate, and therefore reliable. Underestimating your expenses can lead you to think you’ll have more cash available than what you’ll actually have.

4. Plan For Where Revenue Will Come From

I touched on this in tip #1, but let’s dive a little deeper.

Revenue is one of the most important metrics you’re going to include in your financial plan so you want to make sure the numbers are as accurate as possible. That starts by being realistic about where your revenue is going to come from.

In most cases, revenue doesn’t just grow automatically. There’s a catalyst to increase it. It could be salespeople, Facebook ads, content, events, or some other action that’s bringing in leads who will ultimately convert into customers. These are all called revenue drivers, because they literally “drive” your revenue.

You don’t necessarily need to completely map out your revenue strategy during financial planning, but you should be able to account for where any planned revenue growth is going to come from.

Here’s an example of how you can do it.

Let’s say we’re a SaaS company and one of our revenue drivers is Google Ads. We run Google Ads to get leads that will convert into customers. So we need to account for the revenue we’re going to get from our ads in our financial plan.

First, we’ll create Google Ads as an expense, and specify how much we plan to spend on the ads. We’ll plan for $1,000 per month.

Marketing Expense - Financial Planning

Now that we know how much we plan to spend, we need to plan for how much revenue we expect to get from that $1,000. So we’ll head into the revenue section of our financial plan and add our Google Ads as a new stream of revenue.

You’ll have to fill in some data points based on your assumptions like your lead conversion rate and cost per lead. I recommend reading this article for some tips on how to make accurate assumptions for those numbers.

revenue driver - financial planning

Once we add this in, it’ll show in our revenue projections and financial plan.

monthly revenue - financial planning

You can repeat this process for all of your different revenue drivers, including your other marketing channels and your sales team. It’s fun to play around with the numbers and test your assumptions to see what impact they have on your financial plan.

Again, financial planning makes you go beyond just setting arbitrary goals. It makes you think about how you want to achieve your goals, plan what actions you need to take, and how much it’s going to cost.

5. Consider All Employee Costs

Here’s an often overlooked expense you should account for in your financial plan, particularly for newer founders that plan on hiring for the first time—additional employee costs.

Hiring (and retaining) employees includes more than just salaries. Recruiting, onboarding, new equipment, benefits, and taxes are all additional costs that come along with hiring new employees.

According to Glassdoor, the average U.S. company spends about $4,000 just to recruit a new employee. If you hire just 5-10 new employees over the course of a year, that’s an additional $20-$40K you need to account for in your financial plan. And the larger your company, the more employees you’ll typically hire per year.

Here’s a look at some of those “hidden” expenses of recruiting that Glassdoor highlighted.

In Finmark, we make it easy to account for these expenses. You can manually add expenses like background checks and job board listings directly into your plan whenever you hire new employees.

And for things like benefits and taxes, we have a “Load Multiplier” feature that allows you to add on a specific percentage on top of salaries for taxes and benefits. You can add this across all your employees, or do it on an individual basis.

So if we have an employee with an annual salary of $85K, we can add an additional 20% to account for their taxes and benefits.

Hiring Costs - financial planning

In Finmark, we make it easy to account for these expenses. You can manually add expenses like background checks and job board listings directly into your plan whenever you hire new employees.

And for things like benefits and taxes, we have a “Load Multiplier” feature that allows you to add on a specific percentage on top of salaries for taxes and benefits. You can add this across all your employees, or do it on an individual basis.

So if we have an employee with an annual salary of $85K, we can add an additional 20% to account for their taxes and benefits.

load multiplier - financial planning

Then you can see the total breakdown of salary vs benefits and taxes for all your employees.

employee salaries and benefits - financial planning

The more employees you have, the more important it is to account for these extra expenses.

6. Regularly Review Your Financial Plan

Your financial plan isn’t something you should create and leave sitting untouched until a major event like fundraising.

Here’s one way to think about your financial plan. I’m going to throw a football analogy at you, but stick with me!

In football, teams create game plans for each opponent they face. The game plan outlines all the different plays they can use, guidance for what to do in various situations (i.e. when to kick a field goal), strengths and weaknesses of their opponents, and other strategies to increase their chances of winning.

The coach reviews their game plan throughout the entire game so they can make adjustments based on how things are going. For example, if the team has a big lead by the third quarter, they might decide to run the ball more even though the original plan was to throw.

You should take the same approach with your financial plan. As we mentioned earlier, growing a startup doesn’t always go as planned. Your financial plan is your playbook that you should refer back to and adjust based on the situation.

Whenever something happens in your business and you think “we didn’t plan for this”, take a look at your financial plan and see what adjustments you need to make in order to deal with the current situation.

The perfect example of this was the pandemic. Nobody had a global economic freeze in their playbook. As a result, a lot of startups saw revenue plummet, certain expenses like rent became obsolete, growth stalled or declined, and nothing went as planned.

If you just left your financial plan alone and tried to make changes on the fly, you’d basically be playing a guessing game. Instead, you should adjust your “game plan” by reviewing and updating your financial plan.

That could mean lowering your projected revenue, cutting and reducing certain expenses, adjusting your hiring plan, or any other changes you need to account for the drastic shift in your business.

You can do this quickly in Finmark by just duplicating your original plan, and making changes to the updated version. That way you still have the original plan and can compare it to the new one when you need to.

duplicate scenarios - financial planning

Outside of those extreme cases, it’s good to get into the habit of reviewing your financial plan at least monthly.

So many things can change from week to week that require some extra financial planning. For instance, what if your marketing strategy isn’t panning out quite like you planned, so your projected leads and revenue are off. You can adjust your financial plan accordingly.

The bottom line is that plans can (and should) be changed. Financial planning is an active and ongoing process.

7. Share Your Financial Plans

Ask yourself these two questions:

  1. Is your financial planning process collaborative?
  2. Who has access to your financial plan?

If you’re a founder and you’re the only person working on your startup’s financial plan, that’s a problem. And if you’re the only person who ever looks at your financial plan, that’s an even bigger problem.

Financial planning for startups isn’t something that should be done in isolation. If you have co-founders, they should be involved. If you have a team, they should be involved.

I’m not saying that everyone needs to be able to edit your plan, but you should at least ask questions and get insights from stakeholders when you’re putting your plan together—particularly as your startup grows.

Finmark is helpful here too. You can easily share your plan with other people and grant them specific levels of access.

share startup financial plans

Here’s an example of why collaboration is so important for financial planning.

Let’s say you’re building your financial plan, and want to project how much revenue you’ll drive next quarter. You need to know what actions marketing and sales plan to take and what their projections are.

Everything from what marketing campaigns you’ll be running, the expected number of leads they’ll generate, sales rep performance, and other info that’ll help you project how well you’ll perform.

Unless you’re leading marketing and sales, you’ll need to get that insight from your team. Your sales and marketing leaders will be able to give you some additional context around performance as well.

For instance, marketing might let you know that they’re going to be trying some new advertising channels so new leads might be a little less predictable.

Or your sales leader might’ve brought on a new SDR that was able to ramp up quicker than expected, so they’re going to be able to convert more leads.

This level of detail is only possible when you collaborate and get input from your team while you’re financial planning.

The other part of collaboration is sharing and presenting your financial plan. This is actually something we do at Finmark.

About once a month, the founders will review the current financial state of things with the entire company. We go over runway, revenue, customer growth and other parts of the financial plan.

That level of transparency helps everyone get on the same page and sets expectations.

All too often, founders wait until there’s a problem to get transparent about the financial plan. For instance, when they need to cut expenses or reduce headcount. In most cases, the founders know these changes are coming for months, but the rest of the team doesn’t know until it’s too late.

When you routinely review your financial plan with your team, it lets everyone know where things stand and gives them the opportunity to be proactive and course correct if things are trending downward. And when things are going well, it gives everyone a morale boost and motivation to keep growing.

I’ll be honest, it makes it A LOT easier to share your financial plans when you build it in a tool like Finmark rather than a spreadsheet. I’ve seen both, and from an employee’s perspective, looking at the data in charts and graphs is much more engaging and enjoyable than a bunch of cells.

Finmark Dashboard - Financial Planning

When you’re using spreadsheets for your financial plan, you’ll generally have to take that data and create some sort of slide deck to present because spreadsheets aren’t the best tools for presenting data.

The process of building a deck is time-consuming and you can’t show the level of detail in the same way as you can in a tool like Finmark.

During our financial presentations, we dive into things like average revenue per account, which customer plan levels we projected to get for the month vs. what we actually got, and other details that require filtering data and switching between scenarios.

All of that is nearly impossible to do (smoothly) in a spreadsheet, but it just takes a few clicks in Finmark.

Long story short, collaborate! You’ll have a more accurate financial plan and your team will feel much more involved in the company.

Ready to Start Financial Planning For Your Startup?

We covered a lot in this guide. But our goal isn’t just to give you information—we want to make sure you take action.

Start by signing up for a free trial of Finmark.

Whether you’re starting from scratch or transitioning from a spreadsheet, using a dedicated tool will save you hours of time and make financial planning for your startup easier than ever.

Dominique Jackson
Content Manager

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Historically financial modeling has been hard, complicated, and inaccurate. But financials are the lifeblood of any company. They’re too important to be ignored or outsourced. They should be a core part of every founder’s job. This doesn’t have to be scary. And you don’t have to do it alone. The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward.

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