Briefly about important things you need to know when you start dealing with finance in startup
Inspirational and motivational stories about Startupers with burning eyes, craving for their work, and who were able to achieve simply unimaginable success in their startup, came across to each of us, yes.
And, of course, once upon a time there might even be an idea to create your own product, to launch your own startup, because a suitable niche has already been found, and you can be sure that it will work great.
Maybe you are this person, and you are going to start your own startup. And this article is for everyone who managed to catch fire with an idea, but has not yet caught fire with finance in startup.
We will tell you what it is, how it works, and how to deal with finance in a startup.
1. Building a cost-effective business.
Analyzing your business model, paying attention to detail, making assumptions about the future, considering all possible life situations – all this will help turn the idea into a permanent business that brings income.
2. Part of the fundraising process.
In order to get funding for your startup, you need to know at least how much money you need and for what. Investors and financiers want to see your financial model / financial plan to understand the overall picture of finance in a startup.
3. You need one to inform yourself and shareholders.
It is worth setting goals to achieve, as well as having information for comparison. You and your investors need to understand in which direction you are moving forward, and whether you are moving now at all.
Now you understand that finance in startup are really very important. And the next thing that may really interest you is how do you build this projection now?
And we have the answer!
There are two widely adopted methods or approaches to do financial projections.
One is the bottom-up, and the other is the top-down.
The bottom-up is also referred to as “inside-out”, meaning that you estimate the resources you have available, and then you project them outside and the top down, on the other is “outside-in”, meaning that you start from certain data about the market side and market share you are going to be able to get, so the target in terms of revenues you can achieve, and then you work out that implies for your organization in terms of costs and everything else.
The key principle here to understand, which one to use for your case, is the purpose of the valuation.
If you are raising capital, then your valuation should be as to get resources to achieve certain goals and achieve certain growth, so the “outside-in” should be more feasible for you.
On the other hand, if you are doing valuation for internal management or even exit planning can be a case, when the company already achieved a substantial market share and is just growing organically, then you can use the bottom-up.
For a short-term sales forecast (1-2 years), use the bottom-up method, and if you need a long-term forecast (3-5 years), then the top-down method will be ideal.
These are the costs that need to be done in order to put your business into circulation. To predict the cost, focus on your goals, which are defined in the business model.
In essence, these are the costs that you will incur in the course of ordinary business transactions. It is important to determine how any operating costs will affect your business, ie whether it is really important.
Everything is easier here: what kind of staff is needed, for what functions, and how much money to whom to pay. But remember, a good team is one of the success factors.
Here are our sources of funding – investments, assets, loans, subsidies and so on. If the financial model of finance in the startup provides a loan, you should not forget about the return of this loan, as well as interest.
The foundation of your firm, as shown in your balance sheet and capitalization table, is at the bottom.
Above that are your company’s processes. Your income statement and cash flow statement both show this.
Your business model and business model formula are located above that. That is your company’s engine; how about putting that into financial terms?
After that, there’s your operating budget and long-term financial projections.
There’s also the matter of keeping track of your progress. It’s about creating a management dashboard and reviewing your monthly financial statements.
These tools assist you in comprehending what has occurred in your business, what is now occurring in your organization, and what you can expect to occur in your organization in the future. And, if you use these tools to their greatest potential, they can even serve as an early warning system, allowing you to see what’s about to happen in your firm before it happens.
Also, an important thing for the development of their own business is the analysis of mistakes and their prevention in the future.
We have prepared for you the most common mistakes related to finance in startup.
1. Using the financial model as homework or thinking of it as a homework versus a tool.
Don’t continue to do it because investors expect you to do, but because you need to know, how much money you need to do what you want to do. You need to live and breathe this model. Absolutely make it work for you and for your needs.
2. Growth-based versus driver based financial models.
Taking a starting revenue and them just multiplying that revenue by say ten percent forever. Maybe the drop it to five percent after year. And that’s call a growth-based model, and it really makes no sense. It sets a revenue bar that you must reach, but it doesn’t solve how that revenue will be achieved. What you should do – is to understand what the drivers are for that growth (for example, marketing tools, big team that deal with finance in startup). The drivers move your business and they cost money, and if you find them for your business, pay for them, you will grow and grow faster.
3. Using too many variables.
The fewer variables – the easier it is to financial model, and to understand. Spreadsheets are very much a rabbit hole, especially if you know how to use them well, and it’s very easy to fall into this habit of diving too deep or trying to cover too many numbers and then just making a sheet that is no longer useful, but it’s just a burden that you must carry to update.
SUP is a tool that helps you quickly assess whether or not you need to invest in this niche. To do this, you should answer the following questions:
1) How much does it cost?
2) When will he return?
3) When do we get to “0”?
We write SUP to Excel: we prescribe what and how much we need to start the project, and what will be the cost at the start, and what will be the cost in the coming months.
It is important to determine when we get to 0, we will understand when we start earning.
Now we will create a SUP model together with you. All we need is Excel.
Take for example a fairly simple business – a small beauty store (selling cosmetics).
* Note: cells highlighted in green are cells in which information is entered manually. That is, you can change them yourself.
1. Create a file in Excel.
We make separate columns for: Expenditure items, Costs, Amount, In total.
2. In the column “Expenditure items” enter the cost information that we expect when opening. For example, we’ve added costs such as employee salaries, rent, utility bills, and so on. You are already analyzing this according to your business.
In the “Costs” column, we enter information about the approximate amount of how much it will cost.
In the column “Amount” we enter information about how many times we will need to pay for it (for example, rent – put 2, because you will need to pay for the first and last month, equipment put 1, because we buy once, paid and in we already have it.
In the “In total” column, we multiply “Costs” by “Amount”, and calculate the total amount from the “In total” column below.
This is our START (how much you need to start).
3. Next we need to calculate the cost per month.
Create two columns next to each other: Amount and In total.
4. In the “Amount” column, we also need to enter information about how many times we will need to pay for it. But we already have changes, for example: for the salary of two sellers we also need to pay two salaries, as in the beginning, but for Shop sign or Decor we no longer pay every month, because we just had to buy it first, so in the column we put 0.
In the “In total” column, we multiply “Costs” by “Amount”, and calculate the total from the In total column below.
Now we know how much money we need to start, and how much money we need for each month.
5. Determine how much we need to sell to pay off in 5 months (You can change this figure and adjust as you see fit).
We add indicators such as All costs, Buy for, Sell for, Margin, Average costs per month, Sell for a month to zero.
6. All costs = To the total at the start, add the total for the month and multiply by 5 (as for 5 months).
Buy for = price at which you purchase the product (cost).
Sell for = the price at which you sell the product in your store.
Margin = Sell for subtract Buy for.
Average costs per month = All costs are divisible by 5
Sell for a month to zero = Average costs per month divided by Margin.
The magic and coolness of a tool like SUP: you bring it to the investor, and you just have to tell him that the information in the green cells can be changed yourself. That is, the price for selling the product is too low? Let’s raise, and here, we already go to zero on sales much faster.
And so with all the other metrics that are inscribed in your SUP.
Crowdfunding, Loans, Investors, Grants, Credit Cards, Venture Capital, Family/Friends, Business Angels.
Local community of startups, personal social networks of entrepreneurs, trade associations and institutions.
They provide fuel for development: development, marketing, research, product improvement, more employees.
To study and understand by yourself, the help of acquaintances who know this, the involvement of specialists.
It’s easier than simple: contact City Profit.