Financial Planning for Startups/Small Businesses — Part 2
We launched CoFounder (our business) to demystify business management for founders and small business managers with little to no business background. We wanted to be these founders’ and managers’ thought partners, helping them navigate the different challenges at each stage of their business journey. Our team of business professionals has years of experience in consulting, investments, and financial management; plus, we have worked with, as well as in, startups — so we have the knowledge and skills to help them navigate these decisions.
One of our first products was a Financial Planning Tool (our MVP is available here). While there are many finance management software out there, we found most are focused on financial accounting and reporting obligations. On the contrary, we had one simple focus: help founders make informed decisions. The CoFounder Financial Planning tool, mainly targeted toward early-stage startups, is designed to help founders/managers determine whether their business is feasible/profitable or if they need to re-think some aspects. Plus, all our products are designed to be accessible to anyone — regardless of their business/finance skill level.
After weeks of development, our MVP was finally ready. It was not perfect, but it was ready for market testing. We approached one of our friends, who was launching his second business, to try out the product. That was when we got our first reality check. He told us he did not need a financial planning tool; he launched his business because he knew it was profitable. He had yet to decide on an actual business model, but he was already convinced of the business’s viability. As mentioned earlier, we studied finance and worked as consultants/business professionals for years, so this triggered our lecture mode. We iterated the importance of financial planning (our main talking points are written in our earlier post here), and we pointed out why his approach is risky.
He then said something that made us pause, “no founder does full-on financial planning to test their business idea — they jump and figure things out along the way.” We realized then that we were proving his point. Until that moment, we had not used the CoFounder Financial Planning tool beyond testing its functionality. We never did a proper financial plan for our business. We knew it was critical. Yet, we had fallen into the typical startup trap — we became so focused on product development that we did not stop to deeply assess our idea. We jumped before testing.
We fell into the startup trap (we did so on several occasions. We will be regularly sharing our journey with CoFounder in this blog), but that doesn’t make our approach right. We remain advocates for proper financial planning (and not only because we have a financial planning product).
We took our own pill and went ahead and did our own financial projection. I remember texting my business partner immediately after I saw the result of our preliminary financial plan — the outputs were concerning. We only did a simple financial projection, and the red flags in our initial business model already cropped up. It was not fun, but it gave us an invaluable insight.
Financial challenges (e.g. running out of cash, lack of funding, and lack of business model) remain the top reasons most startups fail. One survey of 500 startup founders, conducted by Skynova, found that 44% of startups in 2022 failed due to cash shortages. While there could be different explanations as to why a company might run out of cash — proper financial planning is one action founders/managers can take to anticipate and mitigate this risk.
A financial plan is one of the best tools to test the viability of your business venture. Why? Even a simple financial plan requires so much information that it would force you to consider every aspect of your business.
How do you forecast revenue without a clear idea of how you plan to make money (your business model)? How do you forecast sales without understanding your market? How do you set a price without seeing what other market players are offering? How do you determine your fixed costs without mapping out your operations?
Each line of a financial plan is packed with so much information about your business that just the process of preparing it gives you more clarity. We believe that is already a compelling reason to take financial planning seriously — the cost of not planning is much higher than the pain of taking a few hours/days to sit down and plan.
Plan now or pay later.
What has been your experience with financial planning for your startup/small business? What challenges did you face? What could make the process/plan more helpful/easier for you?
Please let us know in the comments, we would love to hear from you!