5 Reasons Startups Need a Financial Plan in 2022

Building a start-up business can be the most exhilarating and challenging journey an entrepreneur can experience, with significant time spent growing and prospering your business. However, what many startups fail to implement is a financial plan that they can track and follow along the way.

From conceptualizing the dream of having a business to launching it and receiving the necessary results you need, there are many things that could go wrong – if you don’t plan ahead.

Did you know that 82% of businesses fail due to poor financial management?

Often, tech business owners are brilliant, but financial management gets left behind. It doesn’t matter if you’re smart and/or a genius in your field – if you’re not financially savvy, it will sink the whole business.

Imagine if you invested the time in learning the financial literacy needed to keep you and your business ahead of the curve and navigating the long haul. I’m not suggesting that you understand the competency of accounting, but rather, what it means to have “financial literacy” in your business.

A great tool for managing your business finances is to create a financial plan. A financial plan, also known as an operating forecast, helps create business growth strategies. A financial plan also creates a roadmap for managing your money effectively. A financial plan can prevent you from spending money that your business might not be able to cover.

Fractional CFOs help you manage your business and offer strategic advice and guidance. Nevertheless, it would be best to always understand the financial implications of every business decision you make. Successful fundraising of millions of dollars can give a startup a sense of financial security, but the company’s early years are the toughest.

Not having a financial plan could make or break your business. Whether you are getting a cash capital injection or starting your business, knowing your business numbers and having a financial plan will help you increase the profits your business can generate.

Here are 5 reasons why having a business financial plan will help keep your startup profitable:

1. It will give your business a roadmap to financial success

A financial plan breaks down what your business will do, month by month for the next 12 months. Specifically, it plans the number of sales you need to make, as well as your business expenses, to ensure that you hit the targeted profit margin within your business.

Creating an operating forecast for the coming year helps you plan your business and clearly define the goals you want to achieve over the next 12 months.

Not only can you set your goals, but you can see how much you can cut your profit margins. Sales are essential for business, but without profit, you will not be able to grow and increase the size of your business without the profit to reinvest in your business.

2. It will hold you and hold you accountable

When you have a financial plan, it helps you stay accountable to your goals. You need to compare what your business did with what you had planned for sales and expenses, understanding if you fell short of or exceeded your goals. In turn, this information can then be used as feedback on areas where you can improve your business performance, while capitalizing on what is going well.

The feedback you receive, when used, helps you build a stronger, more profitable business. When you take the emotion out of looking at your numbers and recognize that it’s feedback to help you achieve your goals, you’ll continually strive to improve your business every month. As a business owner, responsibility also means observing continued growth and processing information.

3. It will help you make profitable trading decisions

Your business financial plan describes how your business becomes profitable. As the leader of your business, you are either the main decision maker or very close to the person who holds that authority.

The decision(s) you make are up to you, so understanding how and why those decisions will affect your profit line is key when making those decisions. When you create this plan and understand what drives profitability, it will be easier to make business decisions that positively impact your bottom line.

4. It will reduce your waste and overspending

When you monitor your financial activity, you’ll be quicker to plug money leaks that are wreaking havoc on your bottom line. By regularly monitoring your spending, you’ll know where costs are paying off and where they’re hurting you.

It’s important to establish, implement, and monitor key performance indicators (KPIs) that you can measure in your business to ensure that you’re getting a good return on investment for those expenses.

Runaway costs can be better managed with proper planning.

5. It will help you understand your cash flow

When you know the financial activity of your business, you will understand how cash flow comes in and goes out of your business.

A positive cash flow is vital for a business because cash is the lifeline. Having a cash management system in your business makes it easy to keep money coming in and going out.

It is recommended to plan your cash flow at least six to eight weeks in advance. Ultimately, managing your finances in your business will go a long way toward financial success.

Yes, there are many moving parts in a business, but financial management should be high on your list for long-term success. Money management doesn’t have to be difficult, and when you have someone to show you the steps to protect your business, the easier it will be.