One of the important factors in the success of your startup is financial planning. Why is it important you ask? In this article, we will learn importance of financial planning for startups in brief.
Firstly, you should know how much is required to start your startup or business. The second part which is more important is how will you finance all those expenditures? Like in the early stage, in the form of seed capital.
And from there on, the growth capital, which you will require for running continuous revenue sources like the products and services which you provide to the target customers.
There are two different parts of the planning process-
- Startup Expenses
- Startup Revenue
It is the part in which you do all the calculations and come up with a figure like how many funds you will require to start your business? like
- How much do you require for your production?
- How much do you require for marketing?
- How much do you require for other operations of your business?
The second part of the financial planning for startups is the revenue part, i.e. the revenue sources like the products and services which you provide to the target customers.
Calculation of the Startup Expenses
My basic mantra to calculate the startup expenses is to start the calculation from the end part of the designing process, which is customer satisfaction.
So, starting from the customer satisfaction, ask yourself the following questions –
- What is that thing that would make your customer happy?
- How will you deliver that product?
- How will you advertise your product?
- What are the resources which you need to produce that product?
- What kind of resources do you require for hiring and marketing?
If you have the proper answers to this question, you will get an idea of the startup expenses you need to start your startup.
So basically, startup expenses mean expenses you need before the first month, such as creating a logo, website expenses like buying domain and hosting , consultancy like legal, hiring process, market research, online and offline promotional materials, etc.
You yourself are in a better position to know what steps are required to start the business in the various early stages or before launching your product or sales to the target customers.
How do you calculate expenses and do your financial planning?
Your business model will help you in this regard. The business model is part which we have already discussed. For this, the one part, i.e., the key activities of the business. So mind all those key activities and converting them into monetary terms. How much will you require for marketing, building websites and mobile applications, etc?
Like, if someone is going to start his online food delivery service, then what are the things that are required to start this business, i.e. utensils, packaging materials, etc.
If you know your business model and all the answers to the above questions, then there are many financial calculators and tools available online which can help you with the calculation part.
Cost Block of the Business Model
Apart from the key activities, another part which can’t be ignored is the cost block of the business model. The cost comprises two different types of cost, i.e. fixed cost and the variable cost.
The fixed cost consists of the machinery, office space, furniture, laptops, etc. while the variable cost consists of running costs like employee salaries, advertisements, subscriptions to third party services, etc.
These two blocks will help you to come up with the funds you will require to start the business.
Removing Unnecessary Steps
When we plan to start a business, we imagine a lot of things and go before perfection, like, I want a perfect logo, website or a perfect product, rather than starting your business and selling your products and services.
Some of the unnecessary costs like spending too much on logo design, rather hire some intern graphic designer or contact your connections and ask them to design a simple logo for your business with not more than fifty bucks.
If you want to give your personal thoughts and how your logo must look, then you can too create a logo for free through various free logo generator tools or using canva.
The second unnecessary step would be office space. If you can start your business from your home or rent a free space from your family or friends, then you wouldn’t need office space and remove the renting step from your budget.
Another unnecessary step is to buy computers and laptops for your employees. Rather, you can hire people who have laptops. If you really need a laptop, then you can buy a second hand or reburnished one, which is much cheaper than new computers and laptops.
While doing this process, don’t overdo it and remove all the important things which you require for smooth operation of your business.
Let’s assume you require 10 lakh rupees to start your business, then it is recommended to have atleast 0.5 times the fund before starting the business. Because after proper planning and costing, there may be some steps which you neglected, due to which the actual funding amount may increase.
Make Short Term Objective with Long Term Objective
If you want to decide your short term objective and connect it with your long term objective, then I would recommend you to use these steps to find your investment readiness level.
The Investment Readiness Levels are-
0. The idea of your product or what kind of service you want to provide comes in zero stage.
1. The first stage would be converting your business idea into business model or product.
2. The second stage would be competitive or the market analysis.
3. Problem Solution/ Validation
5. Market Fit
6. Validate Right side of Canvas
7. Prototype preparation
8. Validate Right side of Canvas
9. Metrics that matter
So, how much time do you need to do all these tasks? Let’s take an example, if you require one week to draw your business model, and two to three weeks to do competitive analysis, so here the total time taken will be one month. And you want to launch your product or services to the target customer in one year.
Likewise, you have to make a plan and set your short-term goals of one month to achieve your long-term goal of launching your business in one year. Have a weekly/monthly flowchart of activities with an expected fruition time. Better forecasting helps startups plan better for the future.
Sources of Funds for Startups
Here are some sources which can help you to get your funding if you have a proper business model and plan.
- Personal Finances
- Friends and Family
- Angel Investor
- Equity Financing
- Bank Loans
- Venture Capital Firms
- Business Plan Competitions
- Government Grants and Funds
- Incubators and Startup Accelerators