The 4 basics of financial analysis for startups
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If you are a startup you should know that doing a financial analysis and therefore a plan, is of vital importance for your company. According to a study by CB Insights , one of the 20 reasons startups fail is running out of cash. Having a bad planning of the entrances, exits or the lack of projections of your business, will make you navigate without a fixed course.
Money and time are finite and must be allocated wisely. The question is how you should spend the money to avoid falling into the statistic of companies dying along the way.
A financial analysis (with a plan) is a process that helps determine how the company will achieve its vision, strategic goals, and objectives. Consider that while accounting is about looking back, the financial plan looks forward; they are projections of how your business will prosper.
In the world of startups, you can realize the importance of financial planning when we observe these types of companies that have not even reached break even , but that have very large financial valuations, a large part of their value comes from their profits future projected.
So what you should be doing for your company are: systems and processes on a daily basis, analysis and forecasts of short-term cash flows, routine analysis of internal controls, creation and analysis of financial models and simulations, anticipation of scenarios on the cash flows, the financial projections of the company, as well as the projections of monthly, quarterly and annual growth strategies, but not more than three years, since the situation of this type of company is constantly changing.
The purpose of financial planning is to indicate the potential of the company and present a timeline of viability. The financial plan is basic to the evaluation of the project and should represent your best estimates of the financial requirements; To ensure that the value chain, cash cycle, and other economic fundamentals make sense in terms of the business opportunity and company strategies, try to get answers to the following questions:
- What are your gross and operating margins?
- What is your earning potential?
- What are the variables involved in determining prices?
- What are your fixed and variable costs?
- What assets are and will be used in the business?
- When will you run out of cash ?, among others.
Achieving a correct financial analysis is not easy, especially in the early stages, if no one on your team has mastered the subject, you probably require an expert in the field. G2 Consultores, a firm specialized in startups , shares the principles that you must take into account to draw up the best financial plan:
- Having a good plan, financial planning determines whether a business will succeed or fail; a good plan is a very powerful tool. (1) First define the core of the business opportunity and the strategy to take advantage of it, (2) then begin to analyze the financial requirements in terms of necessary assets and operational needs.
- The business opportunity always leads and drives the business strategy, which in turn drives the financial strategy.
- Financing strategy is ultimately determined by the alternatives available, so the principle is obvious: Ideally, raise capital when you need it.
- Cash is king and cash flow is queen , the lack of cash management is one of the most cited causes of problems in companies.
A good financial structure is a great competitive advantage for companies by increasing efficiency in operations and the use of capital, which often leads to a great potential boost. Also, if you are interested in raising capital, investors will look favorably on your startup when you are clear on the numbers. A founder with a good understanding of the finance function will be in a much better position to lead his business to success, no question about that.
Startups often fail to draw up their financial strategy and therefore a plan. Experience dictates that they are not experts in implementing it and therefore it is very common for them to make mistakes.