Article 2 of a 3-Part Series
COVID-19 is affecting startups in many ways. This article is the second in a three-part series focused on recommendations for startups during the COVID-19 crisis.
In the first article, we focused on scenario planning and ended with how VCs are now advising startups to extend their current runway to 24+ months, regardless of when they last raised capital. In this second article, we focus on the “how” – forecasting, modeling, and waterfall analysis. The third article focuses on strategies for reducing costs and bringing in capital.
Tool #1 – Scenario Response Planner
Here’s First Round’s Scenario Response Planning Template. Or check out a completed example below for a fictional startup provided by First Round below.
Tool #2 – Three-Year Financial Model
Build separate models for each of your scenarios and associated contingency plans to determine the cash runway.
- An optimal financial model includes the income statement, balance sheet, and cash flow.
- The plan should be built out monthly, allowing determination of # months cash runway.
- Can you answer, how much cash do you have on hand and how many months is it going to keep you operational?
- Reports should tie in with your chart of accounts, facilitating monthly updates of actual results.
- Financial models need to be customized for each company’s industry and business model – no standard templates!
We created this example 3-year Financial Model at Burkland:
Tool #3 – Regular Forecasting and Waterfall Analysis
We recommend implementing a monthly (or more frequent) forecasting process and tracking changes via waterfall analysis.
- Forecast based on “most likely” scenario
- Identify trigger points that will drive you to shift to an alternate scenario and implement associated contingency plans.
- Waterfall analysis is a helpful tool to track the trigger points and not get misguided by small incremental monthly changes that in aggregate are large variances to the original plan; choose several key metrics to monitor
We created this example Waterfall Analysis at Burkland: