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The 5 Mistakes To Avoid For Your Startup Financial Plan

Many entrepreneurs overlook their financial plan when preparing their business plan or their investor pitch. They often see it as a tick-the-box requirement more than a must to better manage their business’ finances and strategy in the future.

Financial planning is not just for you to manage your business. Clumsy budgets and financial plans are often turned down by investors and are of the main reasons why great startups don’t get the funding they deserve.

Luckily, 90% of all mistakes can be summed up in the list below. Let’s see, one by one, what are the 5 most important mistakes you should avoid when making projections for your business.

1. Overestimate revenues

Whilst it may sounds obvious, forecasts are meant to be as accurate as possible. Yet, especially for pre-revenue startups, financial projections will likely turn out not to be fully accurate, and that’s ok.

Still, you need to do the work and build projections using as many verified sources as possible because your projections will likely be more accurate. Especially:

  • You will make better, informed decisions
  • Your will show investors you understand well your business and your market, giving them more confidence so you can get a fair deal

Need a financial model?

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✓ Charts & metrics
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Overestimating revenues

Revenues are often the most overlooked part of any financial plan for a number of reasons:

  • Product development phase is too short. Especially with tech engineering (e.g. building a MVP), problems might arise down the road and you might have to experience delays before you actually launch
  • Expected market share penetration is too high. Startups often fail to acquire market shares from existing competitors for a number of reasons such as: high switching costs, low brand awareness, lower than expected network effects and virality, etc. If you haven’t considered all these risk factors when assessing your revenues, we strong recommend you do.
  • Conversion rate and / or efficiency is too high. If your revenues are a function of sales people or paid acquisition (paid ads), you might be too optimistic when it comes to the efficiency of your sales force (the number of deals they can close in a month) and/or the return on investment of your marketing campaigns (high conversion rate and/or low cost-per-clicks)

If you are not sure how to project realistic revenues for your startup or established business, read our article here. Also, you should always back up your revenues estimates using a bottom-up and a top-down approach to make sure they make sense. See here an article on how to project revenues using bottom-up and top-down methodologies.

Underestimating expenses

Whilst the scale of overestimated revenues is often more important than underestimated expenses, the impact is very much the same. Indeed, if you have $1.5m in the bank and expect a $150k monthly cash burn whilst it turns out to be $215k instead, your runway isn’t 10 months but 7 instead. This is a really big difference, especially as it usually takes several weeks for a startup to raise equity.

Expenses are often overlooked and they can as varied as:

  • Cost of sales. Example: your supplier quotes $100 unit cost incl. transport but you forgot $10 custom taxes
  • Salaries. Gross salary isn’t unfortunately only what you need to pay. Instead, read all about taxes and benefits you will have to incur as well
  • Other operating expenses. Whilst they can be minimal (e.g. a $200 phone subscription), they can easily add up to a few thousands a month.
  • Consulting & legal expenses. Startups don’t rely heavily on third-party consultants yet you only need to set up a legal entity or even a minor lawsuit to cost you several thousands.

Examples are legion and the ones above only are for illustration. Consider all expenses that applies to your business to make sure you haven’t forgotten any.

Need a financial model?

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✓ Charts & metrics
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2. Lack of sources

Any financial forecast is calculated using 2 distinct variables: your assumptions and verified sources.

Assumptions are by definition the numbers and/or metrics you expect. They can be anything such as pricing (if you haven’t launched yet), conversion rate, churn rate, etc.

Instead, verified sources are numbers which cannot be discussed. For instance, the payment processing fees you will have to pay, the salaries of your existing team, the fulfilment cost per order of your third-party fulfilment provider, etc.

The more verified sources you have in your financial model, the more accurate your projections will be. Of course, you can’t build a financial plan without making assumptions. Whilst there are good public sources out there to find benchmarks to accurately estimate your ecommerce conversion rates or your cost-per-click, you can’t assume your business will perform as better as the average.

By using too many assumptions, your financials may turn out to be very different. You think you can achieve 5% conversion rate for your online shop? Well think twice: average ecommerce conversion rates are in the 1-2% range.

3. Focus on the 80/20 rule

Identify what are the key drivers to your financials. They can impact either revenue (e.g. pricing), expenses (e.g. salaries, commissions) or both (e.g. conversion rate). These drivers are the ones which will impact the most your business, and eventually your cash burn and profitability.

You might be spending hours listing all the subscriptions you will need to pay for your sales team to do their job and carefully estimate team expenses, but might be overly optimistic when it comes to conversion rates. A drop from 3% to 2% can cost you thousands if not millions of revenues, not exactly the same impact of a $10,000 gap in expenses you could have missed when listing out team subscriptions.

This is especially true when forecasting revenues. It isn’t rock science to estimate the cost of your product development, the cost of your paid marketing campaigns (think Google Ads keyword research tool), or the cost to acquire a B2B account by assessing industry-average sales representatives salaries. Revenues in comparison, are much more challenging to estimate. This is especially true when you have not found product market fit or you haven’t launched your product yet.

When presenting your projections and the assumptions behind them, do the same as you did when building out financial projections on a spreadsheet. Focus on the biggest drivers, as they are the ones investors care about the most.

Need a financial model?

✓ Fully editable
✓ Charts & metrics
✓ Tutorial + how-to video
✓ Free email support

4. Calculations errors

This mistake is self-explanatory. You do not need to be a financial wizard to make a great financial forecast for your business plan. Still, you need to understand some basics of financial modelling, corporate finance and accounting too.

If you aren’t sure how you should build projections and if they are good enough, get help. You have 2 options:

  • Find an expert who will build it for you. It can be a financial modelling freelance expert, startup consultant or even your accountant.
  • Get a template: and all the relevant calculations are already pre-built so you only have to plug your assumptions

5. Missing the big picture

You have worked out your financial projections backed up with verified sources, made sure you didn’t forget any expenses and you sense-checked it all for potential errors. Now is time to take a step back and see if they make sense.

Let’s see together 3 examples below:

  1. You realise your business is so profitable that you only need to raise $300k to get started and be profitable, why asking for $1m? Read our article to understand how much you should raise for your startup to understand how to effectively assess the amount you should ask from investors.
  2. You expect that 50% of your funding goes to cost of sales to finance your ecommerce inventory. Well, that’s something you could potentially fund with something else than equity. Read more in our article on what is ecommerce financing and why you should use it. If, as explained in this article, debt makes more sense from a ownership dilution point-of-view, you should take into account debt interest in your projections as well.
  3. Your projected metrics show a 10x LTV:CAC ratio. You sense-checked all your calculations and assumptions and you are quite impressed by such a figure (see an article here for more information on CAC, LTV and how to assess LTV:CAC). The problem might be that you are simply underinvesting in customer acquisition: you are potentially missing on many customers and/or focusing on the most profitable customers only.

Those are only a few examples. They show us that taking a step back may help you tweak your assumptions to improve your financial plan, and ultimately your strategy too.

Need a financial model?

✓ Fully editable
✓ Charts & metrics
✓ Tutorial + how-to video
✓ Free email support