Creating a Financial Plan For a Startup Business (That Actually Works)

Nearly 20% of all new businesses fail within 2 years and 65% within 10 years. Many of these failures are due to a lack of financial planning, according to the US Bureau of Labor Statistics.¹

If you are a founder of an early-stage startup, you might be feeling overwhelmed with spreadsheets, finance terms, and contradictory advice. You probably understand that financial planning is important, but you don’t know how or where to start or, more importantly, how to create a financial plan tailored to a startup. This guide is for you.

We’ll cover all the essential components of a financial plan (sales forecasts, expense budgets, cash flow statements, etc.), as well as the key metrics you need to track (burn rate, runway, CAC, CLTV). By the time you're done reading, you'll have the confidence to take charge of your startup's finances, make smart choices, and boost your odds of success. Let’s dive in.

Wise Business is an industry leader in international payments and easily syncs with leading accounting software. Learn how we can help your business succeed without all the fees.

Try Wise Business

Table of contents
Why a Financial Plan is a Must for Any Start-up Essential Parts of a Startup Financial Plan How to Create a Financial Plan – Step-by-Step Key Financial Metrics for Startup Success Leveling Up Your Financial Plan for Growth Tools and Resources to Lighten the Load Your Financial Plan is Your Startup's Secret Weapon

Why a Financial Plan is a Must for Any Start-up

PRO TIP: Don’t have a Do It Yourself (DIY) financial plan!
Engage an experienced CPA or other industry professionals to ensure you give yourself a solid financial foundation.

It’s tempting to rush into launching your product or service, but without a financial plan, your startup journey may be shorter than you’d like it to be. Think of your financial plan as a road map that helps your startup move from the idea stage to sustainable, long-term success.

Your Startup's Roadmap

A good financial plan provides you with clear direction. With a plan in place, it better assists you in setting realistic short-term and long-term financial goals.

Are you hitting your sales targets? Are your expenses in line with your projections? Your financial plan gives you the answers. Research shows a direct link between planning your finances, forecasting, and getting better results.²

Making Smart Choices

Above all, your financial plan helps you to make informed decisions. You’re no longer making “gut” decisions. You’ll have the data to help you choose between spending, hiring, pricing, and allocating your resources.

Is this the right moment to hire another salesperson? Should you implement the new marketing strategy or put money into developing your product? Your financial plan shows you what you need to make these decisions with confidence.

---

A Smart Choice: Using Wise Business to Avoid Cross-Currency Payment Fees (Try the Calculator)

---

Getting Funding

Let’s be real: you won’t get funding without a financial plan. Investors, no matter who they are, need to see that you get the financial side of your business. They'll expect to see your financial projections, your key numbers, and how you plan to become profitable.

According to a report from CB Insights, the reason "running out of cash" was among the top reasons for failed startups.³ Your financial plan is an opportunity to show that you can be trusted with investment funding and that your startup has a good chance of providing a profitable return.

Helps Manage Cash Flow

Above all, your financial plan is essential for managing your cash flow. Cash flow is everything for a business, but even more so for a startup. You must know how much money is coming in, how much is going out, and when.

A staggering 82% of businesses fail due to poor cash flow management, according to a U.S. Bank study.⁴ Your financial plan helps you foresee potential cash shortages and figure out solutions before they turn into disasters.

Mitigating Risks

Finally, a solid financial plan helps you to mitigate risk. Forecasting dangers and having backup plans will dramatically help improve your startup’s probability of success.

Remember, your financial plan is often a key component of your overall business plan, so make sure it's detailed and well-structured.

Essential Parts of a Startup Financial Plan

Your startup's financial plan isn't some massive, scary document. It's built from several key parts, each offering a unique view of your company's finances and future. Let's break it down.

Projecting Realistic Revenues

Your sales forecast is your best estimate of how much revenue you expect to generate over a specified period. Being a startup, you can't depend on years of historical data. And that’s perfectly fine.

For your sales forecast, you’ll combine market research, educated guesses, and different forecasting methods. Think about starting with the details: how many customers can you genuinely bring on per month? What is the average sale? This is known as the “bottom-up” approach.

Another method you can follow is called a “top-down” approach. What this entails is that you’ll need to estimate the total market size of your product or service. The next step is to then project what percentage of that market you can realistically capture. Regardless of the method you choose, make sure you make forecasts for various scenarios.

Controlling and Keeping Track of Costs

Your expense budget shows how much it costs to run your business. It's crucial to be as comprehensive as possible when it comes to costs.

Keep your fixed costs (the things that stay the same month after month) separated from your variable costs (things related to sales like materials, marketing costs, etc). Be conservative in your estimates – it’s better to overestimate your expenses than to underestimate them. Be sure to differentiate costs as well.

Understanding Your Profitability

Your revenue and expense forecasts will come together in the Profit and Loss statement (P&L), which is also known as the income statement. It tells you if you are making a profit or running at a loss over a certain period – monthly, quarterly, or yearly.

A simplified P&L might look like this.

Revenue

- Cost of Goods Sold (COGS)

= Gross Profit

- Operating Expenses

= Operating Profit (EBIT)

- Interest & Taxes

= Net Profit

Knowing these different profit levels – gross, operating, and net – is essential for figuring out how your business is really doing.

Managing Cash Flow - Your Startup’s Lifeline

The cash flow statement is perhaps your most important financial statement as a startup. It keeps an eye on the actual movement of cash in and out over a time frame.

Just because you’re making a profit doesn’t mean you have cash in the bank to pay your bills and keep your business running. This statement shows your burn rate (how fast you're spending) and your runway (how long you can survive with your current cash).

Burn Rate: Cash Spent Per Month

Runway: Cash Balance / Burn Rate = Runway (in months)

A Snapshot of Your Financial Position

Your balance sheet gives you the picture of the assets (what you have), liabilities (what you owe), and equity (the owner's share) of your startup at a point in time. The balance sheet is important to understand the overall health of your finances.

However, for much earlier-stage businesses, the P&L and cash flow statements often have more importance than the balance sheet. Remember the basic equation: Assets = Liabilities + Equity.

Also, don't just look at the raw numbers on your balance sheet. Calculate these key ratios to assess your startup’s liquidity (ability to meet short-term obligations).

Current ratio: (current assets / current liabilities)

Quick ratio: ( (current assets - inventory) / current liabilities )

Finding Your Break-Even Point

Your break-even analysis tells you how much money you must generate to pay all your costs — the point where you start turning a profit. This is a vital number for setting sales goals and understanding if your business model is even workable.

Break-Even Point (in units): Fixed Costs / (Price Per Unit - Variable Cost Per Unit)

If you’re selling a bunch of products or services with different contribution margins, a single break-even point may be misleading.

In this scenario, try calculating a weighted-average contribution margin based on your projected sales mix and then use that to find the overall break-even point.

Another option is to calculate a break-even point for each product line on its own.

How to Create a Financial Plan – Step-by-Step

Developing a financial plan can feel overwhelming, but if you break it down into manageable steps, it becomes much more manageable. This isn’t a single exercise you do once and then forget – good planning is a continuous cycle of planning, monitoring, and adjusting your process.

Here are some critical steps to get you started.

Step 1 - Define Your Business Model

Before you break out the numbers, get clear on your business model. How will you generate revenue? What issue(s) are you going to remedy for your customers? Who is your target market?

Your responses will help you lay the groundwork for your finances.

Step 2 - Do Marketing Research

Don't rely on guesswork. Get the dirt on your audience, rivals, and trends. Know what your customer wants. Know your customer’s pain points. And know what your customer is willing to pay.

Examine your competitors' pricing strategies and how much of the market they control.

Step 3 - Evaluate Costs

This is where you need to be meticulous. Write down every cost of starting and running your business, no matter how small. Differentiate your one-off start-up costs (the cost of equipment, legal fees, initial inventory, etc) versus your ongoing operational expenses (rent, salary, marketing, utilities, etc).

Be sure to account for potential hidden costs.

Step 4 - Project Revenue (Realistically)

Now, it's time to project your sales. Use the market research you collected in Step 2 to make educated guesses. In order to address uncertainty, attempt both “bottom-up” as well as “top-down” forecasting methods while creating scenarios for each (best-case, worst-case, and most likely).

Be realistic – avoid the temptation to inflate your sales numbers.

Step 5 - Project Expenses (Conservatively)

Develop an expense budget based on your startup costs and ongoing operational expenses. Put your costs into categories (like fixed vs. variable and direct vs. indirect) and aim for accuracy.

You should always overestimate your expenses and never underestimate them.

Step 6 - Create Your Financial Statements

Time to put all the pieces together. Use the assumptions you've created to create your income statement, cash flow statement, and balance sheet.

You'll find plenty of free templates online, or you can use accounting software like Xero or QuickBooks. Many software options, and even some templates, will provide a full startup financial plan example to guide you.

Step 7 – Analyze and Refine

Once you create your first financial plan, don’t put it aside. Review your projections carefully. Do they make sense? Have you noticed any possible risks or weaknesses? Make adjustments to your projections and refine the assumptions you made initially.

Step 8 – Monitor and Adapt.

Your financial plan isn't a static document. It’s a living, breathing tool that you should track and adjust often. Track your actual performance against your projections.

Are you meeting your sales targets? Are your expenses in line with your budget? If not, figure out why and make the necessary adjustments. Your startup must have the flexibility to adapt to change.

---

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

---

Key Financial Metrics for Startup Success

Even though your financial statements offer a full picture of your startup's finances, there are specific key performance indicators (KPIs) you need to measure. Measuring these KPIs regularly equips you with how your business is actually performing, helping you steer the ship.

Burn Rate – Where Your Cash is Going

The burn rate is simply the amount of cash that has been spent each month, net of cash inflows (cash coming in). This metric tells you how quickly you are spending your capital.

Example: If you spend $10,000 and receive $2,000 a month, your burn rate is $8,000 per month.

Runway – Your Time Horizon

Runway tells you how many months your startup can keep going before you run out of cash. Divide your current cash balance by your burn rate to get this number.

Example: With $80,000 in the bank and an $8,000 monthly burn rate, your runway is 10 months.

Customer Acquisition Cost (CAC)

CAC is the total cost of landing a new customer – all your marketing and sales expenses included. Keeping CAC low, while still attracting good customers is the name of the game.

Formula: Total Marketing & Sales Expenses / Number of New Customers Acquired

Customer Lifetime Value (CLTV)

Your CLTV refers to the total amount of revenue you anticipate from a single customer during the entirety of their relationship with your business. CLTV is important because it gives an estimate of the value of your customers over the long run.

Figuring out your CLTV can get a bit complicated, but a simple way to do it is by estimating average purchase value, average purchase frequency, and average customer lifespan.

Formula: Total Marketing & Sales Expenses / Number of New Customers Acquired

CAC Payback Period

This number tells you how long it takes to recoup the cost of acquiring a customer. A shorter payback period is ideal – it means you're turning new customers into positive cash flow faster.

CAC = Total Sales & Marketing Expenses ÷ Number of New Customers Acquired

Gross Margin

This is a vital metric for projecting and monitoring your company's profitability.

Formula: Revenue - Cost of Goods Sold

Contribution Margin – Profit Per Sale

Your contribution margin is how much money you make on each sale (after variable costs). It lets you know how much a sale contributes to covering your fixed costs and, ultimately, making a profit.

Formula: Price Per Unit - Variable Cost Per Unit

Unit Economics

Understanding your unit economics – the direct revenues and costs of a single unit of your product or service – is essential to assess the scalability and profit potential of your business model.

By keeping tabs on these numbers often and knowing what they mean, you can make smart calls on pricing, marketing, sales, and your entire business strategy. Pay close attention to these numbers as they’re your startup's vital signs.

Leveling Up Your Financial Plan for Growth

Once you've got the basics of financial planning down, you can start using more advanced techniques. These strategies help you manage your startup's growth and handle more complex financial situations.

Dynamic Cash Flow Forecasting

Don't just rely on fixed projections. Use dynamic cash flow forecasting. This means building a model that's constantly updated with live data from your accounting software and other sources.

Create different scenarios (best-case, likely-case, worst-case) and update them often – weekly or even daily if needed. This lets you respond quickly to market changes and make better-informed decisions.

Cash Flow Sensitivity Analysis

This technique helps you pinpoint the factors that most strongly influence your cash flow. You create "what-if" scenarios to see how changes (like lower sales or higher supplier costs) would impact your overall finances.

This allows you to proactively manage risks and figure out which levers are most important to control.

Working Capital Optimization

Working capital is the difference between your short-term assets (like cash and money owed to you) and short-term liabilities (like money you owe).

Optimizing working capital means finding ways to boost your cash flow by managing these areas effectively. This could involve:

1. Accounts Receivable: Getting customers to pay you faster.
2. Accounts Payable: Negotiating better payment terms with your suppliers.
3. Inventory: Keeping inventory lean to avoid tying up cash.

Pre-Money vs. Post-Money Valuation

If you're looking for outside funding, you must understand pre-money vs. post-money valuation.

Outside Funding Type
Pre-money valuation is your company's value before any investment.
Post-money valuation is your company's value after the investment.

The difference between these two numbers determines how much equity (ownership) the investors get. This is critical for negotiating funding rounds and protecting your share of the company.

Dilution Modeling

Staying updated with who owns your company is extremely important. That is why a capitalization table or cap table is useful.

A cap table does not just report who holds shares of the company, but rather, it acts as a complete record of ownership of the company’s equity.

Dilution modeling takes this further. You guess how much ownership will change after funding rounds to see how much your percentage will decrease.

Scenario Planning (Expanded): Beyond the Obvious:

Making best-case, worst-case, and likely scenarios is a great start, but true resilience demands more. Model situations where several things change all at once.

Imagine there’s a new rival with a similar product, and prices of raw materials go up. You might also factor in delays in funding.

Put a number to the impact of each factor on revenue, burn rate, runway, etc. to get a sense of potential risks. Also, plan for how you would mitigate them.

Don't Forget Taxes

Accurately forecasting taxes is crucial, but doing this is not as simple as entering a number in your P&L. If applicable, look at both federal and state income taxes.

Don’t forget about payroll taxes (Social Security, Medicare, unemployment) if you have employees. For early-stage startups, estimated quarterly tax payments are often required.

Also, explore potential tax credits, like the R&D tax credit, which can significantly impact projections. Consulting a tax professional will help immensely.

These advanced strategies build on your basic financial planning, giving you a more dynamic and sophisticated way to manage your startup's finances as you scale up.

Tools and Resources to Lighten the Load

Luckily, there are so many tools and resources available to make your startup’s finances more manageable. With the right tools, you can save time and reduce errors significantly.

Financial Planning Software

Investing in cloud-based accounting software can be a lifesaver. Popular choices like Xero, QuickBooks Online, and FreshBooks let you:

• Track income and expenses
• Generate financial statements (P&L, balance sheet, cash flow)
• Create invoices and handle payments
• Reconcile bank accounts
• Some even offer forecasting tools

Get a Jumpstart with Financial Templates

If you are not prepared to spend on software, or if you would like to stay with spreadsheets, you can find many free financial plan templates for startup businesses online.

Search for startup templates that already have formulas and guides built in.

Mentorship and Advice

Don't be shy about asking for advice, but be strategic about who you approach and what you ask. Seek out mentors with specific, relevant experience in your industry or with your business model.

Generic advice can be helpful, but targeted expertise is invaluable. Reach out to experts on Linkedin, Twitter, or Instagram. Set up virtual coffee chats for mentorship. You might create strong, lasting relationships along the way.

Dedicated Startup Communities

Explore online spaces (forums, Slack groups, Facebook groups, etc.) for startup founders. These can be great sources for finding answers to financial questions, sharing ideas and practices, and receiving recommendations for tools and resources.

Examples include subreddits like r/startups and communities like Indie Hackers.

Benchmarking Data

Some platforms are now providing anonymized benchmarking data so you can see which startups in your sector are performing better financially.

This can help you know where you are doing well and where you should improve. Keep an eye on this, as it’s still quite a new field.

Your Financial Plan is Your Startup's Secret Weapon

We've covered a lot, from the basics of financial planning to more advanced strategies. But here's the bottom line: a solid, well-maintained financial plan isn't a "nice-to-have" – it's essential for startup success.

It's your foundation, your roadmap, and your early warning system.

Let's recap the key takeaways:
A financial plan helps prevent disaster. A good plan gives direction, helps you make choices, and gets you funding.
Get a good grasp of the main things: Sales forecasts, expense budgets, P&L statements, cash flow, and the balance sheet. Learn how they work and how they relate to each other.
Make sure you manage your cash flow. Track your burn rate and runway religiously.
Watch your numbers: Keep an eye on CAC, CLTV, and contribution margin to have clear unit economics and make smart decisions.
Don't go it alone. Take advantage of mentorship.
By embracing financial planning, you're not just crunching numbers – you're taking charge of your startup's future and dramatically increasing your odds of achieving your goals.

Sources

1. U.S. Bureau of Labor Statistics
2. Use of Forecast Accuracy Indicators
3. CB Insights’ Top Reasons Why Startups Fail
4. Businesses Fail Because of Poor Cash Flor Mgmt