Why every startup must have a financial plan?

Making up an idea for a start-up is difficult and making it into a successful business with huge turnover is way more difficult. There are a number of factors while developing the business plan for your start-up. Among these factors, the financial plan makes the top priority as many companies lost its place in the market and some even didn’t come into existence because of poor financial planning. So, proper research and planning is a must. Below are some of the ways in which financial planning can help a startup.

To validate the idea

Financial feasibility is important to validate the business idea. In order to validate the idea, you need research and document your financial assumptions documented (e.g. customer acquisition cost, retention rate, average ticket size, gross margin) which will help in ensuring that they are realistic.

Income statement projection and break-even analysis help you understand when you can become profitable and what your profit margin will be like. Cash Flow analysis helps make sure that you do not run out of cash during the course of your business.

To convince others

You can make your idea into a business, but don’t forget in order to make your business moving a huge investment is needed and also be aware of the expenditures that you are making. You can get funds from family, friends, and fools, angel investors, crowd sourcing, or even from the bank. Remember that if there is a risk then the investors will be expecting a more detailed plan.

A solid financial plan goes a long way in convincing the investors about the feasibility of business and R-o-I that they can expect from it.

To prepare for different scenarios

If everything goes according to the anticipated plan, then most of the people in the world would be billionaires with successful stories. Since it’s the contrary, so people who are going to enter into this business field must be well aware and also must accept the situation whether it is good or bad. Being optimistic is the only solution and characteristic an entrepreneur must follow to keep up the energy to move forward.

A good financial plan not just evaluates the business performance in normal scenarios but also helps you conduct What-If Analysis to understand the optimistic as well as pessimistic scenarios.

To make optimal use of resources

Financial plan plays an important role in the resource utilization. Since there are limited resources to start-ups optimal use should be done. To avoid unnecessary expenditures and misuse of funds a financial plan must be allocated for every department and budgeted versus actual expense should be compared every month.

To make and monitor progress

A strong foundation for a healthy business can be enabled with a good financial plan. Not only have that, executing that financial plan also make a crucial role. So it is essential to always monitor and make necessary changes to make a good progress.

To effectively manage cash flow

Financial planning helps you manage your cash flow that is your inflows and outflows. It tells you when exactly you will need external funding (loan or equity). It also tells you how to manage the payable and receivables so that you have sufficient working capital to execute your business.

Financial planning is an ongoing process as it helps you take the right decisions about money so that you achieve your financial goals. Impact of the inflation is the first reason why financial planning becomes more important. Remember that financial planning not only takes long-term goals into account but also short-term goals also.

Resources:

http://blog.offtoa.com/startups-need-financial-plans/

http://www.hightechxl.com/blog/4-reasons-entrepreneurs-consider-financial-planning/

https://www.inc.com/alexa-von-tobel/why-you-need-a-personal-financial-plan-to-build-a-.html

https://www.entrepreneur.com/article/303430

http://smallbusiness.chron.com/importance-financial-plan-small-business-4713.html



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