When companies start out, financial planning and forecasting isn’t typically a high priority. Their first order of business is making and selling a product or service that the market wants and making sure they have enough money in their bank account to cover early costs. Pre-launch financial forecasts are usually wild guesses as to what the actual results will be. These (usually quite optimistic) forecasts are shared with potential investors who generally don’t trust them, but are willing to invest in the founder. This is typically where early financial forecasting stops. Money is in the bank, there is runway for the product launch, and from then on it’s about trying to build a revenue stream.
But the function of finance isn’t just about building business plan forecasts. It’s a process that needs to be developed and improved as the company grows. Early investors don’t spend a lot of time worrying about financial forecasting and cash flows, they want to know there’s money in the bank and revenues are growing. But as companies start looking for Series A financing, or begin to experience rapid growth which can put a strain on cash-flows, founders soon discover there’s a big difference between profitability and being cash-flow positive. Long sales cycles and extended receivables have decimated many high-growth, high-profit companies.
We’ve outlined six steps companies should go through as they develop their finance practice:
1. Get an Accounting System
There are many choices on the market and everyone has their preference. At Beachhead, we’ve used Quickbooks, Xero and Wave, which all work online and sync up with your bank accounts. Your early accountant or bookkeeper should develop a chart of accounts that makes sense for your business and provides enough detail in the output to understand the business without too much complexity.
2. Ensure Monthly Statements are Created and Reviewed
Once you’ve got your accounting software in place, it’s important to start putting together monthly statements and reviewing them. The founder needs to understand how the income statement and balance sheets work as well as how to read a cash flow statement. This process should become part of the monthly management meetings — typically scheduled 1-2 weeks after the start of each month, depending on how fast the bookkeeper or internal finance professional can put the statements together. Companies should also compile these into quarterly and annual statements to start building higher-level views.
3. Build Forecasts
The next step in this process is building a forecast. This is a more complicated job, but an extremely important one. It’s best to view building a financial forecast as a process rather than a one-off activity. You may not need a full-time finance professional to do this. Often, early-stage companies hire outsourced CFOs to build and update forecasts quarterly, or better yet, monthly. But an internal expert is always better because they’ll understand the nuances of how to build sales models and the cost of goods sold. Whether it’s done internally or externally, it should become a priority once you go beyond 4-5 employees.
The forecast should provide the founder with some key information, including:
- Profitability: is the company making or losing money?
- Runway: how long can the company continue in the current and short term state before running out of cash?
- Integration of sales forecasting: how much is the company expected to sell in the upcoming months, and what are the premises for making such predictions (i.e. number of salespeople, monthly sales volume, etc.)?
- Cash in account and cash coming in: understanding how much money is in the bank accounts, as well as getting a high-level picture of receivables.
- Upcoming payables: any large payables that will affect cash, making founders and management fully aware of potential changes in cash position.
4. Compare Forecasts to Actuals and Communicate Results
The next step in building a financial process is doing regular comparisons from the forecasts to the actuals. It builds an understanding between the financial professionals and the management and team leaders of how to forecast accurately. Every forecast is going to be wrong (and usually forecasts are very optimistic), but with each financial cycle they get better as the rubber hits the road and reality takes over. Communication around why forecasted numbers were either too high or too low among team members and management make future forecasts better.
5. Build Your Budget, Team by Team
The next process that needs to be built out is the budget. A budget is a compiled version of what internal teams think will happen with both revenue and expense. Each team leader — from sales to customer support to product — should understand the budgeting process and start to build their own internal budget. These are then shared with the company’s finance professional to integrate into a budget for the entire company.
6. Build a Variance Analysis
Lastly (and this is by no means the end), companies and their finance professional should start to build a variance analysis. This is the formal and structured version summarizing what did and didn’t work, and how much each line item was off.
If your company is still in its infancy, hopefully this summary has given you something to think about when it comes to building up your financial process. If you need more help understanding what stage of the process your company is at, BeachHead can help. Our Organization Audit can provide you with recommendations on the steps and investments you need to make to ensure your company has healthy and strong financial processes.
Connect with BeachHead
At BeachHead, we are passionate about helping businesses scale up from a strong Operations foundation. The BeachHead Organization Audit (BOA) helps founders evaluate their business through an objective lens. Our BOA scorecard allows us to evaluate all aspects of a growing business so we can recommend changes based on what the organization wants to accomplish in the next phase of growth.
If you’re ready to take your company to the next level, reach out and let’s start a conversation.
Email: rdrynan@beachheadstrategic.com
Phone: 416.888-4004
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