Financial Planning for Start-ups at the Fund-Raising Stage

A financial plan is one of the most crucial things that any start-up looking to raise funds would have to prepare before going to investors. This is after a proper feasibility study and market research has been completed to assess the viability of the business. At the fundraising stage, your financiers and other potential investors need to see that the business is economically viable. Therefore, a financial plan is instrumental to providing them a clear picture of your start-ups’ path to profitability.

Asides from serving the purpose of facilitating funding, you, as the business owner, would also want to get a sense of how much future cash flows can be generated from operations and how much investment you would need to acquire capital assets. This is usually the basis of how much funding to request from financiers.

A great financial plan essentially takes your business plan and translates them into figures that are specific, measurable, attainable, realistic and timebound. This plan is then mapped out on a financial model that captures a forecast of the three main financial statements: Profit or Loss account, Statement of Financial Position and Cash Flow Statement.

Define your monetization strategy

Revenue projections – which predicts the business’ future sales based on reasonable assumptions – are usually the first inputs in a financial plan. It can motivate potential investors to buy into your business model if you have the right product monetization strategy. Even if there would be no revenue generated from your product or service from the get-go, it is still necessary to properly define what the major sources of your revenue streams might be in the long run and incorporate them in your revenue model. If your financial plan does not show a potential path to monetization in the future, this can pose a problem for prospective investors and even for your business.

Determine your capital structure

The most optimal capital structure for your business, i.e., the ideal combination of debt and equity, is one that minimizes your overall cost of capital while maximizing your investors’ returns. Prospective investors usually lookout for start-ups with a good capital structure, and with a fewer number of shareholders. They would typically check your capitalization table for this information, so you would want to choose a mix that both maximizes their returns and provides enough leeway to run your business smoothly while also reducing your financial burden. Sometimes, the ideal combination also depends largely on your product/service offering or the kind of industry in which the business is operating and how capital intensive the business is.

To a large extent, the long-term stability of your business is hinged on the capital structure because if a huge chunk of your cash is tied down to paying debts during the early years, the business can easily run into liquidity problems.

Set your Key Performance Indicators (KPIs)

KPIs are very important to you as the business owner, as it is a means to track your performance overtime and then assess them against set targets or benchmark them against industry standards. Your KPI metrics are also relevant for potential investors, as they will be looking for more insights to prove that your business can earn them good returns.

Asides from industry-agnostic KPIs like Gross margin % or Net margins %, there are industry-specific KPIs that you need to be aware of. For example, businesses running a subscription model would typically estimate and track metrics such as Churn rate, Retention rate, Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Customer Acquisition Costs (CAC), Average Revenue per User (ARPU), Customer Lifetime Value (LTV), LTV:CAC ratio, etc.

Your KPIs should ideally be reflective of your business goals and objectives. However, realistically, some of these targets are dependent on a few external factors like the lifecycle of your business’ industry, i.e., how long it typically takes businesses in your industry to move from their growth stage into their maturing phase. In this case, you would need to compile a list of the most important industry performance metrics, narrow them down to the most relevant ones to you and your investors, and then set your targets.

Generate your relevant business assumptions

The major output of any business financial plan typically consists of a monthly financial forecast of the three key financial statements for the first financial year, and yearly forecasts for the next two to four financial periods.

While forecasting your start-up’s three financial statements, you need to understand the key variables driving the business, i.e., your business's major cost and revenue drivers, as this is the basis for creating assumptions for your forecasts. You can estimate your major cost and revenue drivers using the standard metrics from benchmarks within the industry, and then incorporate the ones specific to your own business model. This would help you figure out what your unit economics are, which would help you forecast effectively and improve your cash flow management.

Another essential thing to take into cognizance while building your business assumptions is how some critical macro-economic variables like inflationary rate, foreign exchange rates, interest rates, Governmental policies for certain industries, etc, would impact your major cost and revenue drivers.

Speak to your advisors

It will always be a great judgement call to consult experienced professionals that can provide valuable guidance and support while preparing your start-ups’ financial plan. Whether it is in determining what is the most adequate capital structure for your business and financing needs; or in helping you preparing your capitalization table which tracks and analyses the equity ownership of your shareholders; or in assisting to construct a flexible, appropriate, structured, and transparent financial model; or just generally providing advice on how to structure your capital raise transaction.

Conclusion

On a final note, a financial plan is crucial for every start-up, even if you do not plan to raise funds from investors. A concrete financial plan would help drive economically sound decision making that can facilitate operational efficiency and sustainable growth.

Contact

Halima Abbey

Senior Manager, Financial Advisory Services