A Guide to Prepare Financial Analysis for Startups

source: startup

Financial analysis is the procedure of assessing businesses, budgets, projects, as well as other financial transactions to manage their performance and suitability. Doing so helps in determining an organisation's stability, solvency, or profitability.

When it comes to a startup business, conducting a financial analysis helps them to understand their financial ry steps and preventive meassituation, make accurate decisions, and plan for the future. A strong financial analysis for startups will help them assess economic trends, make financial policies, and create long-term plans for the business.

Mentioned below are the key reasons why start-up businesses conduct financial analysis:

• Conducting a thorough financial analysis for startups with the help of a bookkeeper or professional accountant will enable you to track your earnings and expenditures so that you can track your money in a proper way. By doing so, you will be able to manage your finances and boost the financial health of your organisation. Executing a financial analysis on a regular basis for a newly established business is necessary since this helps them to identify their problems early on and they can take the necessaures to ensure their business is running on track.
• Financial analysis enables you to adopt effective business methods so that you can decide where to invest your assets. Having an overall idea about the financial situation of your business and making a comparison of it with industry averages, you can rest assured of your investment areas.
• Financial analysis can help you plan for the future by identifying trends in your business. This information can help you make decisions about what products to develop, what markets to target, and how to allocate your resources.
• Start-up businesses require financial analysis in order to lessen risk in business. By proper analysis and planning, you can stay away from risky investments or burdening the small organisation with too much debt.
• For newly established entities, financial analysis is necessary to enhance decision making by getting insights into the financial health of your business.

Mentioned below are 6 steps to build a proper financial plan for a start-up business:

Step 1: Determine Your Business Goals

Financial planning is done on the basis of the business goals you want your newly formed organisation to accomplish in future. Even though these goals can change in due course, it is essential to create some initial objectives to help you run your business according to the plan. Here you have to decide on goals like financial growth of the company, increase in the value of shareholders, improvement of products/services, employee development, and so on.

Step 2: Categorise Costs

After deciding your business goal, you need to categorise the costs. This can seem to be challenging, but you can do it by dividing your costs into capital and operational expenses. The capital comprises large investments like land areas, machinery, etc.

When it comes to variable costs, these expenditures vary alongside your production and sales. Some of the commonly known variable costs comprise raw materials, shipping, freelance services, utilities, and so on.  It also includes administrative costs, travel charges, etc.

Step 3: Make Estimations for Financial Statements

This is an important phase for startups during their financial planning process. Apart from projecting only profit and loss statement and capital expenditure of your company, you need to assess the balance sheet and map out assets and liabilities to get an idea about the cash flow estimation. By doing so, you will get an idea of your actual funding.

Step 4: Account for Future Situations

For startups, having a sound financial plan is essential to cope up with the unforeseen challenges which your business might face in future. As you go further towards pursuing the business goals, you will remain in an ideal position to face unexpected expenditures as well as other financial problems.

Step 5: Prepare a Structured Financial Plan for Your Business

After setting your business goals and being assured of achieving the same in future through your business performance, production, and sales, you need to create a structured plan for your progression and tweak it from time to time.

Step 6: Implement and Monitor Plan

After making your plan properly, you need to execute the same. If necessary, you can take the help of a professional financial advisor who can help you achieve your business goal successfully. Remember that creating a plan and implementing the same is not all you need to do. You will have to monitor your plan from time to time to ensure it is helping you go the right way. You can even modify the plan if there is any discrepancy.

Every newly established business needs to undergo a proper monetary analysis in order to ensure its seamless functioning. The principles of financial analysis for a startup business are as follows:

• Form a tactical and scheduled long-term plan and determine the initiatives and plans to implement it.
• Know how operational plans will determine financial results and cause an enhancement of the financial development.
• Find resources to execute your plans and include them within the budget.
• Understand the business and make necessary adjustments on operational or financial goals.
• Quickly figure out the crucial business reasons behind plan-to-actual financial changes.
• Keep a track of both financial and non-financial operational targets in due course to determine more specific targets.
• Create short-term and long-term goals for KPIs.
• Develop structured and strategic operational projects in order to achieve KPI targets.
• Monitor the KPIs outcome periodically.

Mentioned below are some of the noteworthy advantages of financial analysis for a startup company:

• Helps to figure out whether the business is running on right track
• Provides insights into the financial status of an organisation
• Facilitates improved decision-making by owners and managers
• Improves competition of the business against other companies
• Helps in developing long-term financial plans.
• Enables a business to understand its customers and competitors better.
• Helps the business to keep track of its progress over time.
• Helps a business to identify the areas where they are spending the most.

Following are the notable outcomes of a financial model for a start-up business:

• Financial models have quantifiable data that is broadly used for raising funds.
• Financial model helps in attracting investors who wish to evaluate the monetary status before investing.
• It assesses whether a company’s ideas and planning are worthwhile or not.
• It also enables you to determine the revenue and cash flow needs of the business.

Having a crystal-clear idea about financial analysis for startups will help you to make your monetary plan effective. However, remember that a financial plan is a lengthy process and it comprises details regarding your income, expenses, cash flow, savings, debt, investments, etc. So, it will be better if you hire a certified financial planner.