The 4 basics of financial analysis for startups

If you are a start you should know that making a financial analysis and therefore a plan, is of vital importance for your business. According to a study by CB Insights one of 20 reasons startups to fail is out of money. Having a bad planning of entries, exits or the lack of projections of your business, will make you navigate without a fixed course.

Money and time are limited and must be allocated wisely. The question is how you should spend the money to avoid falling into the statistic of companies dying along the way.

A financial analysis (with a plan) is a process that helps determine how the business will achieve its vision, strategic goals and objectives. Consider that while accounting is about looking back, the financial plan is looking forward; they are projections of how your business will thrive.

In the world of startups, you can realize the importance of financial planning when we look at these types of businesses that haven’t even reached break even but which have very significant financial valuations, a much of their value comes from their projected future earnings.

So, what you need to do for your business are: day-to-day systems and processes, analysis and forecasting of short-term cash flows, routine analysis of internal controls, creation and analysis of financial models and simulations, anticipation of scenarios on cash flow, financial projections of the company, as well as projections of monthly, quarterly and annual growth strategies, but not more than three years, because the situation of this type of business is constantly evolving.

The purpose of financial planning is to indicate the potential of the business and present a timetable for viability. The financial plan is essential to project appraisal and should represent your best estimate of financial needs; To ensure that the value chain, cash cycle, and other economic fundamentals make sense in terms of the business opportunity and business strategies, try to get answers to the following questions:

  • What are your gross and operating margins?
  • What is your earning potential?
  • What are the variables involved in determining prices?
  • What are your fixed and variable costs?
  • What assets are and will be used in the business?
  • When will you run out of money?, among others.

Performing a proper financial analysis is not easy, especially in the early stages, if no one on your team is familiar with the subject, you probably need an expert in the field. G2 Consultores, a company specializing in startups shares the principles you need to consider to build the best financial plan:

  1. Have a good plan financial planning determines whether a business will succeed or fail; a good plan is a very powerful tool. (1) Define first heart of the business opportunity and the strategy to take advantage of it, (2) then begin to analyze the financial needs in terms of necessary assets and operational needs.
  2. The business opportunity always directs and guides the business strategy, which in turn guides the financial strategy.
  3. Funding strategy is ultimately determined by the available alternatives, so the principle is obvious: Ideally, raise capital when you need it.
  4. Cash is king and cash is queen lack of cash management is one of the most cited causes of problems in businesses.

A good financial structure is a great competitive advantage for companies by increasing the efficiency of operations and the use of capital, which often leads to a large increase in potential. Also, if you want to raise capital, investors will look favorably on your start when you are clear on the numbers. A founder with a good understanding of the finance function will be in a much better position to lead their business to success, there is no doubt.

start-up often fail to develop their financial strategy and therefore a plan. Experience dictates that they are not experts in its implementation and therefore it is very common for them to make mistakes.

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Sarah J. Greer