Regardless of the industry of your startup, making a comprehensive financial plan will predict your success to some degree. There are more than 1200 startups that are worth more than a billion dollars, and competing with them isn’t easy.
Investors aren’t only looking for companies that will bring them profit, they are also interested in helping companies that aim to transform the world around us achieve their goals. Innovation-driven ventures are some of the more risky investment opportunities, yet they often have the highest potential.
Founders can prevent some significant setbacks by devising a financial planning cheat sheet for their innovation startup. Investors don’t want uncertainties, and showing that you understand the components of finances can make them have a more favorable outlook on your startup.
Key components of financial planning
A cliché quote says that a journey of 1000 miles starts with a single step. Pretty much any complex system can be broken down in a way that anyone can understand. If we look at the confusing world of financial planning, there are some noticeable key components that we can lay out.
You can start devising your financial plan by answering one question “What do you want to do with your money?”. You need to answer this question even if you’re bootstrapping your business, but especially if there are external investors involved.
As a part of your product, you should establish a solid business model. The majority of startups emerged because someone wanted to address and provide a solution for a certain problem.
As a founder, you’re likely aware of the core values that your startup represents, but you should also be able to present them to the average customer and investor. The value proposition of your startup will help you serve as a guiding star for product development.
A significant part of the business model is constructing your revenue stream. Depending on the type of your product, you can decide to offer the following:
For example, software as service products are commonly sold in the form of a subscription. Pricing strategy needs to be adequate to the number of features and innovations that your product offers but also adjusted to the pocket of your average customer.
Innovation startups need to pay special attention to their fee structure as it needs to help them remain competitive within the market landscape.
Discussing the value of your startup and the price at which you’re going to sell your product is exciting, but now we have to talk about the uncomfortable side of financial planning. Innovation startups often require much more investments than regular ones.
Nowadays, there are many startups that design products that are paired with artificial intelligence. While their ideas can be quite revolutionary, their execution requires a large amount of data and personnel.
Cost prediction and awareness aren’t a one-time process. You should conduct a comprehensive analysis not only of the expenses in the near future but also of their potential increase that can happen as your project scales.
Budgeting and resource allocation
There’s a certain hierarchy of expenses that every company needs to be aware of. Innovation startups should pay attention to it as well, even though it might seem that there aren’t as many different expenses for them.
Without a proper budgeting and resource allocation plan, you might end up accumulating debt. Even on a monthly basis, missing out on paying rent or salaries will have a destructive impact on your reputation and budget.
To make handling expenses easier, try to separate those that are predictable and those with the potential to grow. As mentioned earlier, rent, salaries, and utilities will rarely change without you being aware of that upfront.
On the other hand, variable expenses fluctuate on a monthly basis. Predicting the maximal fluctuation of these expenses can help you adjust to the circumstances.
These two types of expenses can be further separated into short-term and long-term costs. Balancing these two types of expenses can help you ensure that your startup will grow as predicted.
Allocation of resources needs to be planned and executed without any setbacks. Thankfully, the financial technology and landscape provided us with much more ways of making payments on the internet than before. For example, you can pay your employees with crypto anywhere in the world completely legal, or you can stick with common bank deposits.
Cash flow management
Managing your cash flow is an important aspect of understanding the financial health of your business. Forecasting your cash flow will help you set the mood for the upcoming challenges that your business might encounter.
Whether you’re expecting a cash shortage or a surplus, a forecast should help you mitigate potential risks, allocate resources more effectively and make better decisions. Sometimes, businesses make plans with the money they don’t have, which eventually leads to large setbacks.
If your startup is operating for a short period of time, don’t be discouraged if your year doesn’t go as planned. Understanding the patterns in which your cash flow fluctuates will take some time and experience.
Once you get a hold of it, you will be able to prepare for lean periods but also to leverage the advantageous seasons during which your profits skyrocket. To protect yourself from unpredicted losses, set aside a budget that will act as a safety net. On top of this, manage your liquidity skillfully.
Startups aren’t limited to a single funding strategy, which is a major benefit. Instead, there’s a plethora of unique options, each with different advantages and disadvantages. As mentioned earlier, bootstrapping is powered by the resources provided by the founder or its team.
Bootstrapping is one of the more challenging ways of funding a startup, but it brings independence at the cost of scale and growth. Other choices are angel investors, that also bring their support and guidance, and venture capital, which gives you a rapid boost at the cost of external pressure.
One of the ways in which you can attract and retain talents is by using expensing stock options. However, in the broader sense of funding strategy and devising a financial plan, there are some implications regarding them that you should consider before utilizing them.
Even with the best product in the world, without creating a compelling pitch that is easy to understand by investors, you will likely miss out on opportunities. All of the topics mentioned before, cash flow, budgeting, value proposition, as well as potential risks and expansion plans, need to be covered by your pitch.
Risk management and contingency planning
All startups are exposed to some level of risk once they enter the market. With innovation startups, the list of potential setbacks is even greater. As a company that brings a new type of product onto the market, you need to consider the uncertainty that customers and clients might have with such innovation.
Cryptocurrency-related startups, for example, significantly suffered from changes in regional and global laws and policies. While innovation startups aren’t often connected with cryptocurrencies, they are still at risk of suffering from regulations. We’ve seen this happen recently with governments discussing banning AI research.
Developing a risk-aware and transparent organizational culture will help you establish a proactive approach to risk management. Instead of making the employees avoid telling their complaints and ideas, encourage them and address the concerns they have regarding the product.
Financial planning is the key to startup success
“Money isn’t everything,” many would argue, but while this statement is often true, irresponsible or even poor financial planning can often lead to failure and maybe bankruptcy. There are many stages of attracting, retaining, and channeling investments, and you should study them thoroughly.
Just like with the majority of business decisions, there isn’t a one-size-fits-all solution for creating a financial plan for your startup. You should focus on analyzing both the current market and economic situation, as well as the strengths and weaknesses of your product.
Once you have that off the table, an important step toward attracting investors is devising a financial plan that will outline your budget, costs, cash flow, and methods for handling potential risks.
Keep in mind that first startups shouldn’t always succeed. Whether the problem lies in the financial aspect, your product, or a situation that was out of your control, don’t let the failure demotivate you. Calculate your losses, and see what lessons you have learned during that process.