Why financial forecasting is important for startups, and how to do it painlessly

When launching a new business, it’s fair to say that planning your finances isn’t the most exciting aspect of being a startup.

However, it is a crucial part of understanding whether your business has a chance of succeeding.

The good news is that there is now dedicated software, tools, and apps that can quickly and easily produce financial forecasts.

So, to help you understand more about how planning your finances can help your startup succeed, we asked Robin Booth of Brixx to share his experience with us;

For the past five years, I have been unusual. This is because of my job, which involves planning for the future.

Specifically, financial modelling. (Stay with me!)

Now, a few years ago, I couldn’t have told you what ‘financial modelling’ is. In fact, it’s not as scary as it sounds. It’s planning—planning what a business’ income and costs, purchases, and borrowing will be over the years ahead and testing that plan.

I’ve learned how important this is and the richness of information it can provide. But when I look at startup conventions and advice for entrepreneurs, planning the financial side of things is way down on the list. Sometimes so far down that it drops off.

If you Google “How to start a business,” you’ll find plenty of guides telling you the importance of your logo, branding, who to hire, etc. But all of this is just so much hot air if the numbers don’t work.

So my question is, why aren’t more people doing this? Why isn’t detailed financial planning an integral part of starting a business?

Financial planning is boring!

I can think of one reason immediately. It’s boring!

My friends think my job is super boring. The reaction I tend to get when I tell them I work with financial planning software is “oh”, followed by questions like “how can that be fun?”

I’m not an accountant, but that’s probably what my friends think I am. There’s not another profession on earth so marred with stereotypes as accountancy. Accountants are boring, serious, no sense of humour, pedantic, bringers of bad news etc. But I’ve met hundreds of accountants – and I can guarantee this stereotype is far from the truth. So it’s not people, but the subject itself.

I think people tend to find finance boring because it’s a bit of an alien language, something which isn’t used in the day-to-day running of a business. But finance is no more boring than physics or chemistry, it’s just that not every business has to employ a physicist or a chemist.

Taking the alien language out of finance, making it real and relevant to how normal people think is a big challenge. But I think it’s achievable. And if that first hurdle disappears, planning becomes so much more accessible.

It’s hard

But being perceived as a boring activity can’t be the only thing holding planning back. It’s also, supposedly, really hard.

When my friends think of what I do, they think I spend my days buried in spreadsheets and formulae. But this just isn’t the case. We make simple tools for financial modelling. There’s not a spreadsheet in sight.

I have the greatest respect for spreadsheet gurus. It’s a fantastic, deep skillset with a hundred applications. But to accomplish a single task like making a financial model there are easier ways. You’ve got to use the right tool for the job, and building something from scratch in a spreadsheet is not always the easiest way.

It’s worth spending the extra time searching for the best way to do something. There are now more tools out there than ever before to help people with every aspect of their business.

These online financial platforms allow businesses to centralise all financial accounts in one place, this way you get all the insights needed when you track your expenses, create a budget or forecast your finances.

The best of these tools automate financial calculations for you, and prompt you about the information they need. Many are available for free, or on a trial basis.

I firmly believe that a good financial forecasting tool can mitigate the ‘hard’ aspect of planning.

It’s not worth it

Being boring and hard would make planning pretty off-putting in itself. But what do you get from planning? Is it worth the hassle? Maybe it’s better to just keep your head down and concentrate on ‘the business’?

The first business of ‘the business’ is to keep running, and then to keep running well. I’m not suggesting we all sit in ivory towers planning our businesses. But when you do plan, what you get is really indispensable.

One of the most important things you get from planning is the ability to make informed decisions;

• Having a good idea of how much ready cash the business will have to invest in future projects a year down the line will affect your choices today.

• Knowing when you need more funding before you need that funding will give you more time to make the right choice of lender/investor.

• Most businesses fail because of cash flow problems. The business has money on paper but not in the bank. Knowing in advance when your cash flow is in danger of letting you down is a pitfall which can be foreseen with a financial plan.

Planning is engaging, (can be) easy and worth it

It’s never too late to start planning your business if you haven’t already. You can start in simple ways by just thinking about your business:

• It has a certain amount of regular income, with some direct costs attached to that income.
• It has some regular costs.
• It has some occasional costs and purchases.
• It may have borrowing and repayments to make.

These are the simplest elements of most businesses. If you project these numbers forward you can begin to make plans based on these predictions. You can plan for worst-case scenarios, for downturns and upturns in your business.

I hope you come to enjoy planning, and once you start, keep planning.

This guide was written exclusively for ByteStart by Robin Booth of Brixx.com, the financial forecasting app that turns your ideas into numbers.