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How to build a business plan for your startup

By Early Metrics Team - 11 March 2022

When pitching your startup to investors, seeking financing from a financial institution, or simply planning future expenses, one of the most important documents you will need is your business plan. A well-constructed P&L will not only signal to investors a strong financial acumen but also help you plan for future costs and expenses. 

However, financial forecasting can be an especially challenging task for entrepreneurs:

  • Startups often have limited, if any, historical financial data to base future numbers on.
  • Projecting commercial performance without a clear commercial pipeline is very hypothetical.
  • Innovation costs and hurdles could be difficult to forecast and anticipate.
  • Founders come from all types of backgrounds and, therefore, don’t necessarily have financial expertise.

The basics of financial projections

Starting with the basics, a business plan spans 3 to 5 years depending on the maturity of your company (the more mature the startup is, the strongest hypothesis you could rely on).

The financial projections should be completely aligned with your commercial and technical strategy. Thus, those are the first things you need to start working on.

Lay down your technical roadmap, R&D strategy, commercial and internationalisation plans. These decisions should be reflected in your projections, making sure your financial documents are coherent in relation to what is laid out in your pitch deck. 

It is also important to make sure the documents are clear and readable for all types of stakeholders by making sure to title and make comprehensive all fields possible. This will allow you to make adjustments to your financial projections easily without having any inconsistencies. It will also help stakeholders better understand your assumptions and calculations.

Building the top line

The top line reflects a company’s capacity to generate sales. As the name suggests, it is the first thing that is reported in a company’s income statement. Your top line can be calculated using a market sizing and share, or the number of customers acquired and pricing. While the former is easier to build for startups with little historical data, the latter is more precise and can be preferential if your company has a demonstrated sales performance. 

Projecting your growth

The second step in creating your business plan is estimating competition and growth. Indeed, the second key component of revenue projection is growth, whether that is a growth in the number of customers, or in market share. Predicting growth can be tricky and is hardly an exact science. However, realistic growth rates are key to giving credibility to your financial projections. A number of factors, both external and internal, should be considered.

Elements that should be considered in your growth are:

1) Past performance

If you have historical data, your future growth should be aligned with your past growth performance. You should be able to justify an improvement through factors like improvement in product quality or growth of the sales team.

2) Competition

A good grasp of competition and market dynamics is key for any founder. In this case, an understanding of the competitive landscape and barriers to entry set by existing competitors is crucial to estimate a possible growth rate. The existence of larger or more established companies in the market can be a challenge for the acquisition of market share. Indeed, existing players will have access to more capital, partners, and a likely larger existing customer base.

3) Switching costs and churn

If your clients or users are switching from a competing solution to yours, they might face costs associated with the need for re-training or to integrate product suites. This can slow your own market acquisition. In the same vein, setting up high switching costs (such as long term contracts) can minimise churn and give better visibility on future revenue. 

4) Market growth and other dynamics

You should account for the behaviour of the overall market when estimating your growth. A thriving market with a high CAGR will see players grow more rapidly, as they benefit from favourable dynamics. The regulatory trends will also play a key role, acting as a challenge or opportunity for startups affected. 

5) Pricing

How will your pricing evolve over time? Premiumisation, improved product and performance, added features can justify an increase in price over time. On the other hand, the commoditisation of a product, intensifying competition in the market, or even increased customer negotiation power can drive down prices for your product.

Estimating your costs

Once again, planned costs need to make sense with your mid-term strategy. Key elements will consist of commercial costs, R&D and product development costs, COGS, internationalisation costs, and salaries. 

Commercial costs need to be fully aligned and proportional to your revenue growth. While a sales team’s performance can improve over time with a more established market presence, fully-trained staff, and a perfected strategy. Therefore, you should look at the revenue growth projected and estimate accordingly the growth for elements like marketing budget, sales and account management team sizes, and number of commercial partners

If your commercial plans include going abroad, this needs to be reflected in your projections. Whether that consists of opening up new physical locations (upfront office costs), developing partnerships (travel costs in months leading up in order to secure partnerships), or selling through existing digital channels (increased marketing costs), the decision impacts the bottom line in a different way. 

Your product roadmap also needs to be completely reflected in the financial projections with an apt R&D budget before each launch. It is important to keep to a realistic product development roadmap, limiting the number of launches a year to a reasonable number based on your product and industry. You also need to adjust the size of the R&D and product teams according to the product roadmap.

Other elements to consider are raising salaries every year in order to adjust for inflation and annual pay raises, office and HR costs, and CAPEX (such as the purchase of equipment). 

TLDR

Building a business plan with adequate financial projections can be both an art and a science. Here are the points we laid down in this article:

  • It is important that your growth estimates are based on historical data if possible and backed by market dynamics. 
  • Make sure your costs represent the commercial and technical plans.
  • The devil is in the detail: remember to calculate your teams’ sizes, salaries, and other expenses accounting for inflation and in alignment with the rest of your plans.

While you can get support in the building of your financial projections, especially if you’re a technical founder, it is really important that you work closely with your financial advisor/accountant to ensure that:

  1. Your financial documents reflect exactly your vision and mid-term strategy for your company.
  2. You get a good understanding of your numbers, which will be key to show investors that you will be able to run your business, make sound decisions, and manage your cash.

These projections will help you tell the story of your startup, so be ambitious while remaining rational. 

By Yasemin Gunes, Associate at Early Metrics

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