Of course not, I hear you say. After all, you wouldn’t have gone through the trouble of developing a product or service, only to fall at the next hurdle. But here’s the thing. Many tech startups put every ounce of their attention into their product and service and forget about finance.
When it comes to startup finance, failing to plan is planning to fail. Here are the reasons why.
What’s in a Phrase?
“If you fail to plan, you are planning to fail.” Uttered by Benjamin Franklin a few centuries ago, this phrase has lost none of its importance. Startup life is volatile at the best of times, and without a solid financial plan in place, you will struggle to:
- Win funding from external investors
- Build a sustainable business
- Avoid bankruptcy
Financial planning is the foundation of building a healthy startup or early-stage company and eventually shepherding that company out of the early stages into sustained growth.
The good news is that tech startup financial planning does not need to be difficult nor take away your attention from your product or service. Successful financial planning is based on consistency and paying regular attention to the numbers. Those factors are more important than generating absolutely accurate information that is several months out of date. Yes – if you’ve followed our blog for a while, you may have heard me say this before.
Financial Planning and Attracting Funding
Naturally, potential investors are interested in the product you describe in your pitch deck. But they are even keener to look at the numbers you’re showing them. How many users will your product have in what time span? What is the predicted growth rate of your company? Are your numbers consistent with the other information you present? And, most importantly, what is their likely return on investment (ROI) in the short and the long term?
Without a solid financial plan to show to your investors, you will struggle to answer their questions. In turn, your budding business will struggle to attract meaningful investment, and very few companies make it out of the starting blocks without several injections of external capital.
To attract this type of external funding your startup needs to show a financial plan.
Building a Sustainable Business
Building a sustainable business is impossible without financial planning.
Even basic financial planning, the kind you do on a sheet of paper or a basic spreadsheet at the kitchen table, allows you to see how much money will be going out and compare it to what’s coming in.
Planning makes it easier to visualize expenses over the course of a few months or even a year. Simple as it may sound, it’s an excellent way of avoiding nasty surprises. Knowing that bigger annual expenses are due in a certain month allows you to set aside appropriate funds safely, ensuring they’re available when you need them. It’s an easy way to avoid spending too much when you simply can’t afford it.
Especially in the early stages of a business, it’s easy to get caught up in day-to-day operations and neglect longer-term planning. You may also feel you’re simply too busy to devote more time to financial planning than a casual glance at your bank account requires. But neglecting financial planning means neglecting your business overall.
Avoiding Bankruptcy
You may be shaking your head thinking that there is a long way between forgetting financial planning and bankruptcy. But for startups and early-stage companies, trading conditions can change fast.
Perhaps you have had a flurry of orders and deposits coming in, putting you in a great financial position in theory. But now you realise that your normal suppliers can’t deliver the parts required to fulfil the order, and other suppliers charge more.
Having a financial plan will allow you to assess within minutes whether you can afford to buy from the new supplier without losing your entire profit. Plus, you can put in place a new pricing strategy to future-proof your operations.
Late payments are another factor that put startups and early-stage companies at risk. Without a financial plan in place, it may be tricky to see when you are expecting income and when you need to put a pause on purchases.
Final Thoughts
Few startup founders truly enjoy the nitty-gritty details of the financial side of their business. However, every founder and business owner can benefit from reviewing their finances regularly and checking them against their long-term plans.
Without a financial plan, you are practically flying blind. That may be successful for a bit, but it’s not the right foundation for a growing business. If you’d like a second opinion on your financial plan or need some help putting a finance plan in place in the first place, get in touch with us. Numbers may not be your favourite, but we love numbers, and we enjoy making sense of them for you.