Develop a Financial Plan for Startups

What is Start-Up Financial Planning?

Startup financial planning is a process of planning the financial aspects of a new business to ensure its sustainability and growth. It’s an integral part of a business plan that comprises three major components:

• Balance sheet

• Income statement

• Cashflow statement

Apart from these statements, this involves creating a structured financial model that outlines the company’s:

• Revenue projections

• Cost estimation

• Cash flow management

• Profit and Loss forecast

• Break-even analysis

• Capital requirements

• Financial metrics

• Risk management

• Funding strategy

Why is Financial Planning Critical to a Business?

The number one reason why most startups fail is due to poor financial management which leads to cash running out before any earnings are realised. A well-prepared financial planning not only helps a business achieve its financial objectives and ensure long-term sustainability but also wins potential investors.

A few key reasons why a propel financial planning is important:

• Resources allocation and efficiency – Businesses can allocate and utilise capital and manpower more efficiently, avoiding waste.

• Goal setting and achievement – It provides a clear financial direction for businesses, helps them track progress and sets more realistic goals.

• Cashflow and budgeting – Ensure businesses meet regular financial commitments, manage debts and avoid cashflow issues.

• Informed decision-making – Allow management to make data-driven decisions on investments, product development or market expansion based on financial health and forecasts.

• Attracting investors and stakeholders – Secure funding and convincing stakeholders of a business’s viability.

Breakdown of Start-Up Costs

Different businesses will have different types of expenses. However, there are a few types of expenses that are common for most types of businesses. Understanding the recurring and one-time costs will help businesses analyse the cash flow needed to at least break even and set aside enough money – usually, six months’ worth until they are past the early stages.

Common start-up costs

• Market research

• Financial advice or general business advice

• Licenses or registrations

• Leasing and bond

• Telephone and Internet

• Insurance

• Power connection and bond

• Marketing and website development

• Equipment, fixtures and fittings

• Staffing and wages

• Initial materials and stock purchases

Ongoing start-up expenses / Monthly expenses

• Salary of owner/manager

• All other salaries and wages

• Rent/lease

• Advertising

• Supplies

• Utilities (telephone, electricity, water, gas)

• Insurance

• Loan interest

• Professional services costs (legal, consulting, accounting and financial services)

• Other monthly costs

One-off start-up expenses

• Market research

• Fixtures and equipment

• Fit-out

• Deposits for utilities 

• Deposit for rent

• Legal and professional fees

A snapshot of a start-up’s costs is shown as below:

Download the fillable PDF spreadsheet to calculate small business startup costs

Types of Financial Statements

Balance Sheet

A balance sheet is a summary of all the business assets (what the business owns) and liabilities (what the business owes). At any point in time, it shows how much money the business would have left over, known as the owner’s equity.

Formula: Owner’s equity = Assets – Liabilities

Source: Invoice Berry

Income Statement

The income statement or Profit and Loss (P&L) statement will generally be split into 2 sections:

Revenue – all income from:

• Primary business activities (e.g. sale of products and services)

• Secondary activities (e.g. interest income)

• Any other financial gains (e.g. profit on the sale of assets)

Expenses

• Cost of goods sold

• Operating expenses

Important figures to explain a business’s profitability:

Gross profit = Total revenue – Cost of goods sold

(This is an indicator of overall production efficiency and a key figure for setting prices and sales targets)

Operating profit = Gross profit – Operating expenses

(This shows profit generated from core operations, excluding expenses from interest or taxes)

Net profit = Total revenue – (Costs of goods sold + Operating expenses)

(The total amount earned (or lost) after paying all expenses)

Source: Zevant

Cashflow Statement

A cash flow statement shows how much cash is moving in and out of your business over a period of time.

Sources of cash inflow:

• Debt repayments

• Selling unnecessary assets

• Rebates

• Grants

Sources of cash outflow:

• Payment to suppliers

• Wages and super

• Bills

• Maintenance

• Other business expenses

Source: Business.com

Bottom Line

In conclusion, developing a robust financial plan is crucial for the success and sustainability of startups. An effective financial planning for startups often means breaking down big items such as startup costs into definable cost types and amounts. This will serve as a solid foundation for the company to allocate resources wisely and set realistic goals but also enhance decision-making and risk management.

References

Queensland Government n.d., Common business costs, Queensland Government, available at <https://www.business.qld.gov.au/running-business/finance/essentials/costs#common-startup-costs>.

David, L 2021, 10 Small Business Startup Costs, Oracle Netsuite, available at <10 Small Business Startup Costs | NetSuite>.

Chris, B.M 2024, Financial Statements: List of Types and How to Read Them, Investopedia, available at <https://www.investopedia.com/terms/f/financial-statements.asp>.

Queensland Government n.d., Financial Statements, Queensland Government, available at <https://www.business.qld.gov.au/running-business/finance/essentials/costs#common-startup-costs>.