Annual Financial Planning Best Practices for Startups with Debbie Rosler

In this Mucker Growth Session, Debbie Rosler from Burkland reviews best practices for building a startup annual financial plan. 

Objectives of Financial Planning for Startups

There are 6 key objectives of an annual financial plan for startups:

1. Goal Setting: Financial plans help set measurable goals that align the organization’s performance targets, ensuring that the entire team works towards the same objectives.

2. Resource Allocation: Financial plans provide a comprehensive view of a company’s financial picture—revenue, expenses, cash flow, and fundraising needs—guiding strategic investment decisions.

3. Cash Runway Management: A key aspect of the plan is to understand the cash runway and fundraising schedule. Regular cash flow projections help startups know when they will run out of cash and when to start fundraising.

4. Organization Alignment: Creating an annual financial plan helps ensure team members and groups are all “rowing in the same direction” and doing so efficiently.

5. Contingency Planning: Startups can anticipate challenges by building forecasts and contingency plans, reducing the impact of unexpected setbacks.
6. Investor and Stakeholder Confidence: A solid financial plan demonstrates that the company has a clear understanding of its financial situation and a strategy to achieve its goals, instilling confidence in investors and stakeholders.

Financial Planning Processes Based on Startup Growth Stages

Financial planning evolves with startup growth as needs and teams expand. Annual financial planning processes can be categorized into small, medium, and large stages:

• Small Stage (Early Seed/Series A): At this stage, financial planning is streamlined and may only involve a few key players, such as the CEO and finance lead. The process can be managed with Excel or Google Sheets, starting around November for companies with a December fiscal year-end. Planning at this stage focuses on a simplified, high-level financial strategy.

• Medium Stage (Series B/C): As the startup grows, planning becomes more involved, with department heads managing their own budgets and collaborating with the finance team. The process might start in October, giving teams more time to align their plans. Collaboration tools like Google Sheets or specialized planning software (e.g., Finmark) can help manage inputs from multiple stakeholders.

• Large Stage (Pre-IPO): By this stage, the financial planning process becomes complex, involving coordination among 25+ team members across divisions. More sophisticated financial planning tools and FP&A systems are typically introduced to handle the increased complexity.

Key Milestones in a Medium-Stage Startup’s Financial Planning Process

As startups grow to the medium-stage, department ownership gets introduced and the financial planning process evolves. A typical financial planning process at that stage would include these key milestones:

1. Planning Process Design: The finance team creates a timeline, model templates, and establishes roles and responsibilities. A kickoff meeting is held to align the team on expectations.

2. Top-Down Goals and Initiatives: Strategic priorities for the year are established, including revenue goals and investment targets. Board alignment is often sought at this stage to ensure targets meet investor expectations.

3. Bottoms-Up Planning by Departments: Department leaders create their detailed budgets based on their needs and present them to the CEO and CFO. This is followed by negotiations to align the bottom-up plans with the top-down goals.

4. Finalization and Board Approval: After negotiating and consolidating plans, the financial projections are presented to the board for approval, typically by December or January, with some recalibration after year-end.

Financial Plan Deliverables

The primary deliverables from a financial plan should include:

1. Financial Projections: Startups should produce monthly income statements, balance sheets, and cash flow statements for the fiscal year. Ideally, a startup should maintain a balanced or “50/50” plan, where there’s an equal chance of meeting or missing targets. This balanced approach helps manage risk while setting realistic goals.

2. Revenue Planning: Revenue should be built using a driver-based model, breaking down the factors contributing to growth (e.g., number of sales reps, quotas, pricing). Companies should also segment revenue by relevant categories such as business segments, geographic regions, or customer types.

3. Expense Planning: A detailed expense plan, with a focus on people-related costs (headcount, compensation, benefits, equity), is essential. For SaaS companies, staffing is often the largest expense, and planning must account for future hiring, salary adjustments, and incentive compensation.

4. Cash Planning: Understanding cash runway is critical, especially for determining when to initiate fundraising. Cash planning should factor in the timing of cash inflows and outflows, and align with the company’s milestones and fundraising goals.

5. KPIs and Incentive Compensation Plans: Startups should define key performance indicators (KPIs) that align with company goals and use them to structure incentive compensation plans. KPIs help measure success across functions, while incentive plans (such as sales commissions) ensure employees are motivated to meet targets.

6. Scenario Planning: Building upside, base case, and downside scenarios helps startups prepare for uncertainties. Companies should regularly update their forecasts and adjust spending based on revenue performance.

Execution Throughout the Year

It’s important that financial plans are not treated as static documents, especially in the ever-changing early days of a company. Startups should revisit their financial plans periodically throughout the year, comparing actual performance against projections and adjusting their forecasts accordingly. Key tips for execution include:

1. Monthly Reporting: Regularly review actual financial results against the plan, and adjust for variances.

2. Rolling Forecasts: Update financial projections based on real-time performance and adjust strategies for areas like hiring, marketing, and product development.

3. Mid-Year Plan Recalibration: In some cases, if there’s significant divergence from the original plan, a formal mid-year reset may be needed to align projections with current realities.

Key Takeaways for Early-Stage Startups

For pre-seed and seed-stage companies, it’s important to focus on:

• Cash runway management: Knowing how long your current funding will last based on monthly cash burn is critical.
• Headcount planning: For early-stage startups, expenses often revolve around staffing plans, making it essential to have a clear understanding of hiring needs.
• Quick and simple financial models: A basic Excel spreadsheet to track runway and spending might be all that’s needed in the very early stages.

In Debbie’s experience, a common regret among later-stage founders is not pivoting quickly enough when revenue doesn’t meet expectations. Delaying necessary adjustments can lead to overspending, forcing painful layoffs or budget cuts later on.