In a startup, the problem is almost never the idea: it is understanding whether the numbers truly hold it up. And yet the Business Plan is still treated by many as a formal document to present to investors, instead of as the first real tool for controlling the business. It is there, in fact, that the project’s sustainability is measured, the financial needs are estimated and the KPIs that will guide future decisions are set from the start. Without this step, talking about growth often means flying blind.
What the Business Plan is
The Business Plan in a startup represents the “translation” into numbers of the growth path you intend to take. Its primary goal is to verify whether the business assumptions have a positive impact on the numbers, in terms of expected profitability but above all of financial flows.
The Business Plan answers the following questions: how much liquidity do I need to make my investments? On what timeline can I activate further investments?
Moreover, the Business Plan is useful for setting all the KPIs that will have to be monitored from the very start of operations (CPL, CAC, churn rate, etc.).
Knowing your business and the nature of the costs/revenues you will record allows you to adopt, from time zero, an explanatory reclassification of costs and revenues that will be an enormous help in the subsequent phases of reporting and management control.
Although the Business Plan is typically built over a 5-year horizon, it is useful to set it up on a monthly basis, because the first 12/24 months are the starting base for drafting the Annual Budget.
What the Annual Budget is
The Annual Budget is an operational document useful for monitoring the trend of costs/revenues and of inflows/outflows over a horizon of typically 12/24 months.
It takes its cue from the Business Plan but, unlike it, the Budget takes into account both the growth path you have decided to take and the results achieved on a weekly/monthly basis.
Indeed, above all in a startup’s first phases of life, it is vitally important to constantly monitor inflows and outflows and to be able to compare them with the Budget and with the Business Plan. For this reason, it is important to adopt a homogeneous, constant reclassification of every cost/revenue and inflow/outflow item, in order to compare the objectives with the real data.
Moreover, for a startup it is fundamental to be able to change its actions quickly, either to adapt to market changes or to validate certain assumptions. For this reason, having a Budget that takes into account both the actuals and the forward-looking forecasts over the short/medium term is a tool of awareness and of extreme usefulness for all of a startup’s decision makers.
What the most common mistakes are
Of fundamental importance for a correct cash flow forecast is being able to update the annual budget at least on a monthly basis.
An important item to monitor is VAT. For a startup in its initial phases, VAT has a fundamental impact. Typically, startups in the initial phases incur far more costs than revenues. This dynamic generates a negative impact in terms of cash flows, since it is plausible that the startup records VAT payable in the initial phases. This extra outflow has an impact that grows with the share of expenses tied to external suppliers. In this case, being able to estimate the impact of VAT, and even more its possibility of recovery (plausibly from the following year), becomes vitally important.
Moreover, it is important to be able to account for all the financial flows that have not yet materialised, typically receivables and payables. In particular, managing to monitor certain payable items linked to staff (e.g. severance provisions, holidays and leave) can prove fundamental in certain moments of financial stress.
Not by chance, monitoring the cash is one of the priority aspects inside our startup studio. For this reason, we have structured ourselves with an administration team and AI tools to map and monitor all the flows on a daily basis. This activity is fundamental to allow the management of each of our companies to analyse the trend of company performance and, above all, to update, on a monthly basis, the forward-looking budget in light of the results achieved, typically in the previous month.
Conclusion
Building a Business Plan coherent with the startup’s development logic, and the consequent monitoring of the annual budget, is a distinguishing element of proper company management, as well as an element of transparency and trust towards investor shareholders, where present.
Managing to monitor the trend of the cash and its forward-looking evolution, taking into account the available runway, allows you to implement effective strategies and choices and to adapt the evolution of the business to the company’s needs.
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Startup Bakery is the Italian startup studio specialised in creating B2B SaaS companies with Artificial Intelligence. We offer aspiring Co-Founders the opportunity to develop a business idea. We create investment opportunities for Professional Investors. We help companies in their innovation process.