As a startup founder, being able to manage your company’s finances will dictate your success.
If financial budgets are your strong suit, here’s the quick, and more importantly, simple guide to creating your first financial forecast.
Start with a budget
It sounds simple and it is! Think about the bare bones of your company, what are the most essential items and how can you get them cheaply? This is the time to do your research.
Once you know your expenses you can add them into an itemized excel spreadsheet and deduct your startup capital (funds you have available to invest). This will show you how quickly your funds will run out without any revenue.
Note 1: This step will also help you later when you set your KPIs, price your product and service based on your costs and create your financial forecast. This step will also help you know when you need to raise capital aka capital raising milestones.
Note 2: If it’s cheaper to pay for a year in advance, don’t. Your startup will often adapt and adapt quickly and pay for a year in advance will often cost you more than paying the monthly fee which you can cancel if you need to change the software or adapt your company. Paying for your expenses monthly also means your start-up capital will last longer as you’ll be paying for a month at a time rather than a whole year.
Price your product.
Looking at competitors will help you here but it’s also important to know if the price of your product can cover your costs.
When you’re thinking about this, remember that you don’t have an established brand yet so the more affordable your product is, the more likely someone will try it.
Note: You can increase your prices later. It’s often beneficial to start with an ‘introductory offer’, this way you can gain some traction and you’ve managed client expectations by putting a time limit on your more affordable pricing, otherwise, you may lose clients if you start hiking up your prices.
Once you know your budget and the price of your product you can start setting KPIs (Key Performance Index). KPIs are a fancy way of setting your minimum sales targets.
Your minimum target should be ‘how many products or services do you need to sell to break even (cover your expenses). Then add 10% to this to max it your goal target. If you reach your +10% figure, make this your new minimum and add another 10% – this will ensure you’re always growing and pushing yourself and later your team to go the extra mile and drive revenue to your business.
Write a financial forecast
Once you know your budget, you’ve priced your product, set your KPIs, now it’s time to put pen to paper and show how reaching your KPIs will play out financially.
Financial forecasts can be complicated but a simple way to create one is to add in your revenue if you reach your minimum target and then your revenue if you reach you +10% figure. Then minus your expenses from this. This will simply show how profitable you will be over the next 12 months – it’s also how you calculate EBIT (Earnings Before Interest and Tax) so in plain English, it’s revenue minus expenses which equals your profit or loss.
Note: This financial forecast is what you need to include in your pitch deck for investors, showing how your company can grow to become profitable.
Once you’ve started marketing your product, the key is to assess which avenues work best for you, PR, FB ads, Instagram – you’ll be able to tell from the analytics of who buys from your website. Focus more on what works and less on what doesn’t.
The next step from here will be assessing how to reduce your CAC (Customer Acquisition Cost) basically the cost of marketing to get a client and therefore a sale. The most successful companies scale with a close to $0 cost per customer, this keeps their expenses low and revenue high per customer. This will, in turn, make your financial forecast more attractive to an investor and it will grow your business faster and make it more sustainable over the long term.
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