The Smarter Startup

3-Step Approach to Annual Financial Planning for Startups

Debbie Rosler, CFO for startups, lays out a simple approach for early-stage startups to set their annual financial plan.

In this piece, Debbie Rosler, CFO for startups at Burkland, lays out a simple approach for startups to set their annual financial plan.

It’s that time of year again… leaves are falling from the trees, people are enjoying their pumpkin spiced lattes… and finance teams everywhere are working on their company’s annual financial plan. For some, the mere mention of an annual plan elicits groans in anticipation of a lengthy and cumbersome process involving seemingly endless meetings and heated negotiations. Indeed, when I led corporate planning at a Fortune 500 company, the process spanned many months and involved countless hours of work for hundreds of employees.  

Luckily for startups, the process is dramatically streamlined and can be completed quite efficiently with a dedicated finance professional’s help, and deliver significant benefits to the company. The purpose of a financial plan is to align the team on the company’s vision and objectives for the coming year and set a clear path for how to invest the company’s limited resources to achieve these goals.   

When should startups build their annual financial plan?

I always recommend having a financial plan finalized and approved by the Board before the beginning of the next fiscal year so that your team is continuously operating with known targets. The timeline to complete a financial plan can vary by company. In my experience working with many Series A stage venture-backed companies, I find that most early-stage startups can construct a plan within 3-6 weeks. Based on this timeline, many companies with a December fiscal year end should be kicking off their planning processes around now (early November) and targeting Board approval of their plans in December. 

…many companies with a December fiscal year end should be kicking off their planning processes around now (early November) and targeting Board approval of their plans in December.  

Who should be involved in creating the annual financial plan?

You should have a dedicated finance resource with experience building financial plans and leading financial planning processes who can do much of the heavy lifting. Many startups that don’t yet need a full-time internal CFO choose to hire an on-demand CFO Consultant from a firm like Burkland. Most startups I work with like to have input from their full executive team in building the plans, although, at the earliest stages, some CEOs do the work on their own in partnership with their finance lead.

3-Step Annual Financial Planning Approach:

There are three key steps in the financial planning process for an early-stage startup:

  1. Build the financial model, inclusive of trendline-based assumptions
  2. Gather inputs from the team and evaluate tradeoffs and scenarios
  3. Finalize the plan and get Board approval

Step 1: Build the Financial Model 

The first step in the financial planning process is for a finance professional to build a financial model. Most startups build their models in Excel or Google Sheets, but there are also some financial planning software solutions targeted at early-stage startups that are growing in popularity, such as Jirav. When building your model, make sure that you apply the same chart of accounts structure as what is in your financial systems – e.g., the income statement in your model should look like your income statement in QuickBooks. This way, you’ll be able to easily update your forecast outlook in the model throughout the year and compare your actual results against your plan on an apples-apples basis.

For many startups, the first financial model you build will be a 3-5 year long-range plan, often built in advance of raising outside capital. Companies that already have a long-range plan can minimize the effort it takes to build an annual planning model by leveraging the existing long-range model and just doing a deep dive refresh of the next fiscal year. Keep this dual purpose in mind when building your first long-range plan, and make sure you develop your long-range plan model at a sufficient level of detail (e.g., monthly) to be able to repurpose the work for your annual planning process. 

In building out the model, your finance lead can streamline the rest of the team’s efforts by analyzing historical revenue and expense growth and building the model with preliminary assumptions based on trendlines and knowledge of business plans and objectives. For companies that are large enough to have department-level P&L ownership (usually by the time the company is 40 or more employees), I generally provide department leads with pre-filled templates that show the first draft of projected expenses for their departments. These can then be modified as we evaluate growth objectives and tradeoffs in Step 2 of the planning process.

Step 2: Gather Inputs and Evaluate Tradeoffs and Scenarios

Once the model is built and pre-filled with initial assumptions, the CEO and executive team need to review and provide input. I generally find it most productive to gather their preliminary inputs, update the model, and then schedule an executive team working session to iterate on the plan.  

During the working session, the executive team should align on the team’s vision and objectives for the year and translate this into specific revenue growth targets and required investments. The team should also evaluate tradeoffs between different expenditures and agree on which targeted investments must be prioritized or cut to maintain an acceptable cash burn level.  

As part of this process, it is often useful to build scenario plans to anticipate various outcomes and associated responses. Scenario planning has been an incredibly helpful tool in the post-Covid landscape when many startups have faced higher levels of uncertainty around business prospects and their ability to raise their next round of financing. To the extent that a company builds multiple scenario plans, they should select one of these scenarios as the “base case,” which becomes their annual financial plan.

Step 3: Finalize Your Plan and Get Board Approval

Following the executive working session, some additional analysis and updates may be needed to finalize the plan. The CEO should sign off on the final proposed plan.  

The last step is to get approval from the Board. Ideally, the plan should be pre-vetted with the Board in advance of the Board meeting. Depending on the hands-on nature of your Board members and the extent to which your annual plan is a significant shift from your operations to date, it may be worthwhile to schedule a pre-meeting with Board members to review the plan. Otherwise, you should distribute pre-read materials that provide detail about the proposed plan at least two days before the Board meeting.

There you have it… startup financial planning as easy as 1..2..3! I hope you enjoy your pumpkin spiced latte and happy planning!