Posted by Early Growth
March 20, 2014 | 6-minute read (1041 words)
Why spend time creating a financial plan if you don't use it to guide your business? If creating a financial plan is one of the single most impactful steps entrepreneurs can take in creating a thriving business, following it is critical to making sure a business stays on course. A good financial plan literally serves as roadmap to establishing and growing your startup.
If you've gone through the trouble of setting priorities at the outset, your plan will be a powerful tool for assessing performance as your business grows. Treating it as a one-time “to do” while ignoring it on a day-to-day basis, means you risk flying blind, potentially losing everything because of a lack of vigilance. Below, I'll cover a few of the pitfalls that can result from ignoring your plan.
You won’t be able to accurately measure progress—If you're not working to a plan, how will you monitor performance? By not regularly consulting your plan, you are likely to miss early indications that you are off course, maybe burning too much cash too soon, when problems are easiest to correct. Maybe your plan called for initially low prices with a plan to raise them to more realistic levels later as key goalposts are achieved. How will you know when you’ve met those milestones and need to shift gears if you're not referring to your plan?
You’ll lack comparative data—Since you're unlikely to have the market all to yourself, you'll want to analyze your performance versus competitors’ so that you stay one step ahead, or preferably increase the distance. Not knowing what your performance is in relation to the industry means that you might be flying by at 70 miles per hour (going for broke on fancy office digs and acquiring customers) while others are cruising steadily at 55 (keeping overhead low and cutting expenses). If you aren't regularly reviewing your plan, you might miss important signposts.
You're more likely to run off a fiscal cliff—By outlining your priorities based on your end goals, your budget is a record of trade-offs; increased spending in one area means you have less to devote to another. If you're not closely monitoring your plan, you won’t know when it’s time to change course or where and how much you can/need to trim spending. Worse, you're in danger of running out of cash just when you need it most.
For example, what if you underestimated development costs? Or maybe your plan called for called for fewer employees to start in favor of spending more on marketing to ramp up sales. You anticipate reaching an inflection point within three years, at which time you'll need more funding. Careful monitoring of your actual results versus the plan might alert you that sales growth is running six months ahead of your previous estimates so you need to secure funding now or risk losing the customers you've worked so hard to bring on because you don't have enough cash to invest in more staff. That may sound like a good problem to have, but uncontrolled growth can really hurt. And the time to seek funding is now, not when you're desperate and about to go off the fiscal cliff.
Sometimes following the original plan proves to be impossible because it conflicts with a business imperative or because the business as structured isn’t workable. This is the time to rethink your financial plan. But if you’re not looking ahead for potential obstacles, you won’t have any advance warning before being forced to pivot.
You’ll limit your access to potential funding sources—As I mentioned above, not only are you driving blindfolded without a plan, you'll also find your business cut off from attractive funding sources. Maybe you've bootstrapped it so far, but to take things to the next level, you'll need to broaden your funding base. If you're looking to tap banks for a portion of that they will require financial plans and a report of your current financial position. They'll review them to see how closely you're tracking with your plan in assessing how risky a loan to you might be. Likewise, angel investors and venture capitalists will want to see how your performance has tracked with your projections. Not knowing where you are in relation to your plan or being unable to explain how and why you veered off course is a sure way to lose credibility with existing backers as well as scare off any potential new investors.
You'll lose the ability to plan your exit—A good plan forces you to think through your exit strategy. What would success look like to you? And how will you know when you're there? As difficult as it is to contemplate, the fact is many startups fail. If your business should prove not to be viable, how will you know when to deploy the airbag? If this happens, you will be in a much worse position if you did not see it coming and have time to prepare. If you have assets to sell, physical or intangible, you'll get better terms when you can avoid a fire sale. More time also gives you the opportunity to try to renegotiate leases and wind down the business in an orderly fashion before you've spent every last cent.
Review your plan often, measure your performance/progress against it, and analyze any significant deviations. But keep in mind that it is not set in stone. It should be a living document - providing direction and changing as your business strategy does - not a straitjacket.
Are you sticking to your financial plan? Why or why not? Tell us about it in comments below or contact Early Growth Financial Services for help creating—and sticking to—your financial plan.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.