Why You Need A Financial Plan?
Download the Financial Planning Template for Startups Here: https://docs.google.com/spreadsheets/d/18x0gqvOZiliJud-JiwwglXY_5imhrsbaHzTi1mJ4mns/copy
Financials models are nothing more than a bunch of hypotheses thrown together in a spreadsheet. Your job is to come up with your own unique set of believable hypotheses.
That being said, all financial plan have one hypothesis in common:
Your plan will turn out to be false
At first, this got me quite frustrated.
Why the hell should I waste my time entering random numbers in a spreadsheet if I know damn well the whole plan is wrong?
The goal of an early financial plan is not to demonstrate how great the opportunity is. The goal of an early-stage plan, especially for first-time founders, is to show investors you truly understand what drives growth.
Unless your team has a proven track record, your financial plan should serve as a tool to convince investors you know what you are talking about. Use it to show where you are going, how fast you want to go and most importantly, explain how you will get there.
Before investors will even look at the actual numbers, they are going to assume you do not have what it takes. They know the biggest risk for inexperienced early-stage founders is the execution risk.
But how do you convince investors you have what it takes?
By being practical.
Building The Model
As I said earlier, financial plans are nothing more than a bunch of unproven hypothesis thrown together. These hypotheses can be grouped into 2 categories.
- Revenue growth hypothesis (what drives growth)
- Cost-structure hypothesis (what drives cost)
The “costs” hypotheses are the easy ones. With a bit of research, you can easily figure how much you need to budget for each item.
The tough ones are the revenue hypotheses.
When you build a model for a SaaS business, Monthly Recurring Revenue (MRR) is the most important line on your plan. The real challenge is then to come up with reasonable, yet ambitious MRR hypotheses.
This is where it gets tricky.
Successful SaaS startups grow their MRR at a rate between 10% and 25% monthly growth rate (MoM). You can use these benchmarks as sanity checks for your model but don’t use these numbers to project your growth.
Because you’re not telling your investors how you are going to hit these growth targets. You have no clue how to grow at a 10%+ MoM growth rate.
Therefore, the key is to identify the growth hypotheses that will directly impact your MRR.
My plan has 3 growth hypotheses:
- Increase the number of customers (KPI: Number of new customers)
- Increase the average transaction value (KPI: Average revenue per new customer)
- Increase the frequency of repurchase (KPI: Monthly revenue churn rate)
These growth leverages directly impact MRR
All others metrics (traffic growth, conversion rates, etc…) are secondary.
Where to go from here?
Now that you know what grows MRR, you can start plugging numbers and growth rates to see how the model behaves.
Open the template, look for the tabs “Growth Hypotheses” and “Cost Hypotheses” and fill out your numbers.
Then, based on your newly established goals, define what activities and actions you will put in motion to reach your goal.
Now the fun part…
Once you filled out your growth and costs hypotheses, take your 3 growth hypotheses from above and start brainstorming actions and activities you could put in motion to drive growth.
Let’s do a quick one together here:
Increase the number of new customers:
- Drive inbound traffic: SEO, blogging, social media, partnerships, PR campaigns
- Drive outbound traffic: Email prospecting, cold calling,…
- Improve Marketing Website: Write new copy, promote new features, record a demo video, optimize speed, optimize SEO, design new website, A/B testing…
- Optimize free trial: Marketing automation campaigns, customer success, sales
Increase the average transaction value:
- Target a better market/persona
- Go upmarket
- Increase prices
- Build better features
Increase the frequency of repurchase
- Improve product reliability
- Upsell to existing customers
- Build new features
- Incentivize yearly billing
- Invest in customer success
Make sure these ideas map your goals. For example, don’t bother posting 3 tweets a day if your goal is to sign 10 customers a day.
Build you own action plan and get confident you’ll be able to reach your goal.
Financial planning is more than an item you check on your fundraising checklist.
It’s a tool to help bridge the gap between you and your investors.
Startup investing is all about reducing risk (both factual and perceived) as much as possible. Use your financial plan as a tool to help your investors understand your reasoning. By doing so, you decrease their perception of risk and increase your odds of getting funded.
And remember, the goal is not to make the plan perfect. The goal is to get investors confident that you know what you are talking about.