Financial Planning Software For Startups – Do you have a startup and want to build a sustainable financial future? Discover best practices in a comprehensive guide to financial modeling for startups.
You probably answered yes at least once. If you started your own business, this probably applies to all three questions.
Financial Planning Software For Startups
It is crucial that all three models are covered (in some form) by the financial model. Whatever the reason you ended up reading this article, it seems that financial modeling is an important topic to you too, otherwise you wouldn’t be here, would you? 😉
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Well, you’ve come to the right place! After supporting around a thousand start-ups and scale-ups with their financial models over the past few years with the Finance Navigator team, we’ve written everything you need to know and the best financial modeling practices available for start-ups: the definitive guide to financial modeling for startups!
NOTE: We do not provide any financial modeling templates in this article. Why? There are tons and tons of them available online: just search for “model financial model” online and you’re done.
This article was written to do something that a model cannot do for you: help you understand the various elements and technical details of a startup financial model, learn how to complete it, and check your data so that you can understand the results yourself. And if you need
Check out Finance Navigator: our financial modeling software for startups trusted by entrepreneurs in over 50 countries.
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Before we get into the technical details and the various elements of the startup financial model, let’s broaden our view a bit and explain why forecasting is generally an important topic for startups. Almost all companies do some kind of financial planning or budgeting, but there are specific reasons why a financial plan is important for startups in particular:
Often, building a financial model is not really a problem. The number of templates you can find online is countless and there will always be someone who knows Excel to help you with technical issues. The REAL problem (and the question we get most often) is: how do we get to the numbers?
Using a top-down approach, you work from a macro/outside to a micro view. Typically, industry estimates are taken as a starting point and reduced to targets relevant to your business.
Essentially, the top-down method helps you define a forecast based on the market share you want to capture in a reasonable period of time. A useful aid in top-down forecasting is the TAM SAM SOM model.
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The TAM SAM SOM model captures market size on three levels: the total worldwide market for a product or service (TAM: total available market), the portion of that market that you target with the specific offer your (niche market) designed for your geographical range (SAM: Serviceable available market ) and the part of the SAM that can be realistically acquired (SOM: Serviceable Available Market), given the existing competition. The SOM is therefore equal to your sales target as it represents the value of the market share you want to capture.
Based on the sales targets defined using the TAM SAM SOM model, the next step is to estimate all the costs that are necessary to build or deliver the product or service and the costs all that are necessary to carry out sales and marketing, research and development, and general and administrative tasks to keep your business alive.
By estimating them, you obviously aim for profitability within a reasonable time. In other words: at some point, all costs and expenses must no longer exceed your target income to achieve a positive EBITDA (earnings before interest, taxes, amortization).
The downside of the top-down approach is that it can lead you to overly optimistic forecasts (especially sales). Often marketers calculate SOM (equal to sales) by taking a random percentage of the market without actually assessing whether the target is realistically achievable.
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A small percentage of the market may seem insignificant, but it may be too optimistic, for example, in the year of launch. Therefore, it may be useful to complement the top-down approach with a bottom-up approach.
The bottom-up approach is less dependent on external factors (market), but uses internal company data such as sales data or your company’s internal capabilities. Unlike the top-down approach, the bottom-up approach starts with a micro/inside view and moves towards a macro view. This means that forecasts are made based on the key drivers of your company’s value.
A short example: let’s assume that one of the main drivers of an online SaaS business is online marketing. One online marketing tactic is to advertise your product through LinkedIn. The company can determine the cost per click using the LinkedIn advertising tool, estimate the number of site visitors it will attract as a result, conversion from site visitor to lead, and conversion from lead to a customer.
Based on these indicators, the company will have a good idea of the potential sales, limited of course by the budget available for online advertising. Carrying out a bottom-up analysis therefore not only forces you to think about what the realistic goals are for your business, but also to think about how you will spend your resources.
What Is Fp&a, Or Financial Planning And Analysis?
With the bottom-up approach, you estimate income, costs, expenses and investments in the same way as described above: based on available resources and company data. The downside of the bottom-up method, however, is that it may not show the optimism needed to convince others of the potential of your business.
If you’re a startup founder looking for funding, a bottom-up approach may not be enough. Investors usually expect startups to grow quickly and gain significant market share quickly. The bottom-up method may not reflect this.
It is difficult to predict a steep growth curve if each sale needs to be rationalized and starts with your maximum capacity (or advertising budget). With a bottom-up approach, factors such as virality or word of mouth are difficult to account for. In addition, the main reason that external financing is often needed is to increase production capacity and grow faster than the company does organically.
Therefore, when building a forecast for your startup, it makes sense to combine bottom-up and top-down methods, especially when you plan to achieve a strong growth curve with external funding. Use the bottom-up method for short-term forecasting (1-2 years ahead) and the top-down method for long-term forecasting (3-5 years ahead). This makes you very well able to justify and defend your short-term goals, while the long-term goals show the desired market share and the ambition that an investor is looking for.
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Regardless of which approach you use to build your startup’s financial model, it’s important to be able to back up your numbers with assumptions. As a startup, historical data is often not available, so you need to be able to provide “proof” behind your numbers.
It also helps when you start talking to investors as they are usually interested in knowing the reasoning behind your numbers. You are considering monetizing your company so you don’t want to give them the feeling that you are selling a bubble!
Assumptions can be anything that supports your numbers: market research, web searches, supplier contracts, price controls, historical sales, conversion rates, bills of materials, traffic -website, etc. It can be useful to create a “data room” (folder on Drive) where you collect this type of evidence. In this way, you will slowly build a library that supports all the numbers you have entered in your model, and you will be well prepared in case an investor requests a due diligence process.
Now that’s more than enough background to get you started. Let’s get to the point: the financial reviews that a good (startup) financial model should contain!
Financial Section Of Business Plan
Every industry, company, business owner and investor is different, but a good financial model usually has at least three outputs.
Every sector, company, business owner and investor is different. Everyone has their own interests and everyone values different metrics. From this perspective, it is safe to say that each financial model has its own characteristics. Thanks to this, it is possible to adapt each model to its user.
However, a good financial model typically includes at least three of the following outputs: a financial statement, an operating cash flow forecast, and a KPI review.
Any decent financial model predicts three financial statements: the income statement (P&L), the balance sheet (BS) and the cash flow statement (CF). Financial statements are the generally accepted way to communicate financial information between companies, banks, investors, governments and
