5 Reasons Why Startups Need a Financial Plan in 2022

Founding a startup business can be the most exhilarating and challenging journey any entrepreneur will experience, with a considerable amount of time spent growing up and making your business successful. However, what many startups fail to implement is a financial plan they can follow and track along their journey.

From conceptualizing the dream of having a business to actually launching it and receiving the necessary finding 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 financial mismanagement?

Often, tech business owners are brilliant at doing, but financial management goes by the wayside. It doesn’t matter if you are intelligent and/or a genius in your field – if you are not financially literate, it will sink the entire business.

Imagine if you invested the time in learning the necessary financial literacy to keep you and your business ahead of the game and cruising for the long-term. I’m not suggesting that you understand the skill of accounting, but rather, what it means to be “financially literate” in your business.

An excellent 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 may not be able to cover.

Fractional CFOs help you manage your business and offer strategic advice and guidance. Still, it would be best always to understand the financial implications of every business decision you are making. Successful capital raises of millions of dollars may make a startup feel financially secure, but the first few years of the business are the most challenging.

Not having a financial plan could make or break your business. Whether you have a cash injection of capital or bootstrapping your business, knowing your business numbers, and having a financial plan will help increase the profit that your business can generate

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

1. It Will Offer Your Business a Roadmap For Financial Success

A financial plan breaks down what your business will be doing, month by month for the next 12 months. Specifically, it plans out how many sales you need to achieve, along with the expenses in your business, to ensure that you are meeting the targeted profit margin within your company.

Creating an operating forecast for the year ahead helps plan your business and get crystal clear on the goals you want to achieve in the next 12 months.

Not only do you get to put down your goals, but you can see how tight you can make profit margins.  Sales are essential to business, but without profit, you won’t be able to grow and increase the size of your business without the profit to reinvest into your business.

2. It Will Keep and Hold You Accountable

When you have a financial plan, it helps keep you accountable for your goals. You need to compare what your business did against what you had planned out for both sales and expenses, understanding whether you fell short of your goals or exceeded them. In turn, that information can then be used as feedback on 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 and 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 will continually strive to improve your business each month. As a business owner, accountability also means observing continuous growth and information processing.

3. It Will Help You Make Profitable Business Decisions

Financial planning for your business outlines how your business becomes profitable. As the leader in your business, you are either the primary decision-maker or very close to the individual that does have that authority.

The decision(s) you make fall on you, so it’s essential to understand how and why those decisions will affect your profit line when you make those decisions. When you create that 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 Excessive Spending

When you monitor your financial activity, you will be quicker to plug up money leaks that wreak havoc on your profitability. Through monitoring your expenses regularly, you will learn where costs pay off and where they are 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 are getting a good return on investment for those expenses.

Runaway costs can be better managed through proper planning.

5. It Will Help You Understand Your Cash Flow

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

Positive cash flow is vital for a company as cash is the lifeline. Having a cash management system in your business helps keep money flowing in and out with ease.

It is recommended to forecast your cash flow at a minimum of six to eight weeks ahead of time. The bottom line is that managing your finances in your business will go a long way in creating 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 does not need to be hard, and when you have someone to show you the steps you need to take to protect your business, the easier it will be.