What makes good financial planning so important to the success of your business? Simply put, the better understanding you have of the fundamental financial model of your business, the more intelligent financial decisions you’ll be able to make at some of the most crucial and stressful times you’ll face – when things in the future don’t go exactly as expected.
A ton has been written about the what, how, and why of good planning. Here’s a summary of some of the best advice out there from some great investors and entrepreneurs:
What kind of questions does a good plan help you answer about your business?
- Paul Graham: “Assuming their expenses remain constant and their revenue growth is what it’s been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die?” The most fundamental financial question for your business.
- Jason Lemkin: “Your Zero Cash Date is the most likely date, at your current spend/burn, that you will run out of cash.” Again, the core financial question for your business.
- Tomasz Tunguz: “Can we hire another engineer? What if we spent $15k on this conference? What is the impact of hiring a VP of Sales? How does this accelerate our out-of-cash date? Does this accelerate our path to the milestone?” A good plan helps you make the right investments in your business.
What types of things should you consider when starting to build a plan ?
- Sunil Rajaraman: “Every CEO needs to fully understand the cost of doing business before deciding to raise any outside capital. You don’t want your burn rate to get ridiculous in the early days, so force yourself to put something basic together” An excellent post on the types of expenses to take into account in your plan and why it’s important to get a handle on these things early on.
- Nikos Moraitakis: “This is a guide on how to build an 18–24 month financial plan for an early stage SaaS company with product market fit, some revenues, growing staff and operations and a financing round in the works.” A great outline on the next phase of planning beyond initial expense planning, along with excellent advice on sanity checks and materiality.
How can you get the most value out of your planning process?
- Brad Feld: “Don’t panic, but don’t be caught off guard. Assume you won’t make things up and get ahead of them by figuring out what your real trajectory is.” Brad’s post was about first quarter planning, but the key advice in this post applies year-round.
- First Round (Dave Brussin): “We treat the end of every quarter like the end of a full 12-month year,”Brussin says. “That means we roll the last 12 months together and review all the metrics just like you would at the end of any year — we’re just constantly shifting the year by a quarter.” A great plan only stays great if it’s kept in sync with reality. Here’s a great approach on keeping plans up to date.
Why is this stuff so important?
- Tomasz Tunguz: “Financial planning is all about ensuring the company has all the resources it needs to accomplish its goals and that’s priority number one for every startup.”
- Simon Rothman: “A startup’s budget is a strategic document not a financial one.”
Those two quotes sum up why good financial planning matters so much. Whether you’re using your own custom spreadsheet, one of the templates from these posts, or Opstarts for your planning, the most important thing is to get started with some sort of plan so you’re never caught off guard when things change.
Follow @Opstarts on Twitter to stay up to date with the latest on planning best practices and Opstarts product info, and feel free to email ([email protected]) or tweet (@devahaz) me any feedback or questions!