The lack of financial projections is one of the main reasons startups do not develop. Although disruptive ideas are one of the first steps towards development, knowing how to control finances is decisive for the healthy growth of the business.
In this article, we will show you the importance of keeping financial projections in the daily life of startups, what needs to be done, and the benefits of this initiative. So please keep reading and understand better about it!
Summary
- How vital is this practice for companies?
- Where to start?
- Determine your niche market
- Make a revenue forecast
- Choose an efficient technology
- What are the long-term benefits?
- Greater managerial effectiveness
- Financial control
- Financial health
How important is this practice for companies?
A business plan is a crucial tool for the development and growth of a startup. It works as an economic assessment, but it also validates the ability to negotiate payments to minimize the incidence of debt.
Its features do not end there: the idea is also focused on decision-making regarding financing and projection. Once expenses and gains are controlled, it is possible to have more security when deciding on future investments and to allocate resources in each area.
In short, the idea is to provide growth to the business in a scalable and sustainable way. Not to mention that this is an instrument used to negotiate with suppliers.
For a long time, finance was more focused on tax issues. However, with market changes, high competitiveness, and the time of economic crisis caused by the Covid-19 pandemic, it has become an instrument that needs to plan to manage their business better and gain strategic weight when it comes to knowing your market.
Where to start?
The effectiveness of a financial projection is linked to how the company handles it. Therefore, any planning begins with analyzing the business’s financial data. For those starting in the business world, such as startups, we’ve separated some tips that will help direct your efforts.
Determine your niche market
Before entering the world of numbers and spreadsheets, you need to understand how the market in your segment behaves, analyzing the business’s potential reach. Each sector has its specificities, even more so for the target audience.
For example, a class, A, demands a different type of product/service from a class Cone. Consequently, this impacts the specialization of the service and the location of the business, among other points, thus reflecting on costs and, later, on the final price charged to the consumer.
Make a revenue forecast
Once you’ve studied your niche market, it’s time to perform the so-called revenue forecast. Then, the startup will be able to guide its strategies, taking into account price policy investments in research, among others.
In addition, it must define revenue expectations for the next year, considering three scenarios: pessimistic, moderate, and optimistic. The first focuses on the worst situations, the second on a realistic situation, and the third predicts an extremely favorable scenario.
Even if it is not accurate, the manager will better view the minimum and the maximum. This will help provide better input when making a decision.
Choose an efficient technology
To create a financial projections plan and define the parameters to be measured, it is necessary to find a tool that allows financial projection. This is an ongoing process; the technology needs to be intuitive and easily accessible.
There are many free options, such as Google Sheets and software that allows you to create custom flows. However, regardless of your choice, it is necessary to record earnings and expenses, controlling everything entering and leaving the company.
Depending on the complexity of your business, you can create spreadsheets for each sector and supplement them with additional financial projections information. For example, this is the case for SaaS startups with ARR and MRR and need more detailed projections.
What are the long-term benefits?
Having financial projection is beneficial for every business. Discover, below, the long-term advantages of having such control!
Greater managerial effectiveness
What does that mean? There is a decrease in cost projection errors, both fixed and variable, which avoids surprises at the end of the month.
When projecting results, it is possible to visualize the team’s productivity, the need for more people, training, or the acquisition of new equipment to improve the services provided.
Financial control
Another advantage to be highlighted is that, with the financial projection, it is possible to have greater financial and budgetary control. This means an opportunity to plan the expansion of the business, knowing the possibilities for investment, if it will be necessary to inject external capital or if the own resources are sufficient.
Finally, with control, it becomes easier to identify the fixed and variable costs and the impacts they will suffer from the projections made in the different scenarios we are talking about, from pessimistic to optimistic.
Financial health
Brazil has one of the highest tax burdens globally, not to mention high business costs. This causes many companies to close in their early years, especially those that do not have any financial planning.
Therefore, making financial projection is essential to maintain the growth plan over time, considering the different needs of the business. After all, there are external interferences, such as the economic situation.
Financial projection are essential in the life of a startup, both in the short, medium, and long term. Without them, there is no direction for the work, and if you plan to grow and evolve, you need to invest your time in strategic issues. This is interesting, for example, when participating in a mature startup accelerator program.
To read more articles Click here
