Forecasting best practices are cricital for startup success. It gives you a clear idea of where your financials are heading if you stay the course, if you change your strategy or if you come across a worst-case type of scenario. But for a startup, they mean a lot more.
Forecasts for startups are a tool that, beyond informing you on where you’re going, can also be used to secure funding. Which may be critical to the future development of the whole enterprise.
Investors won’t simply give you funding with a haphazard forecast. How you develop your forecast makes a big difference, in other words, your forecast has to be as accurate as possible so it can be a convincing tool to show to others where you are heading.
This article will be a guide of the best practices for building your forecasts.
Use a Rolling Forecast
Traditionally, financial forecasts are built from historical data. If you want to do yearly forecasts you would use last year’s data, if you were to build a quarterly forecast then you would use the previous quarter’s data, and so on so forth.
Rolling forecasts rely on year to date data so that you can increase the accuracy of your forecasts and then compare how the results compare to your original forecasts.
There are two main reasons why a rolling forecast is preferable to a traditional forecast for startups:
- It lets investors know your ability to meet the forecasts: If you’re an early stage startup, then forecasts and projections are all you have to show to investors about the viability of their investment. But if you’re already operating, then rolling forecasts will help give extra credibility on longer term forecasts since rolling forecasts essentially mean that you can deliver on what you offer from an operations standpoint.
- It gives you real time feedback to base your decisions on: Rolling forecasts lets you see how effective your strategic decisions were in getting you closer to what you were laying out on your financial forecast and gives you the feedback to correct course if necessary.
Plan for Multiple Scenarios
Scenario planning is at the heart of building a set of financial tools that allows you to be prepared for whatever comes your way. One of the most useful aspects is that it allows teams to know that they have a plan in case something goes wrong or right.
From an investor’s perspective, scenario planning allows them to assess the amount of risk involved in their investment. Being able to share this with investors indicates that you know, understand and are in a position to manage best and worst case scenarios.
Here are two aspects for you to consider adding to your forecasts:
- Build scenarios that consider the impact of outside forces: As everyone learned in 2020, there can be outside forces that no one controls that can have a huge impact on your development. Outside factors that can disrupt your entire model and even force you to pivot. Knowing which outside factors can force you to close your doors, pivot your strategy and which ones your business model can manage gives a clear perspective of how resilient your startup is.
- Build scenarios based off of triggers events: Waiting until something happens can be too late. Oftentimes there will be some sort of indicator when something big is about to happen. It can be a shift in the market, moves from a competitor and so on. Knowing when you’ll act and the impact of the timeliness is a big factor in being able to either win or lose big.
Track the Right Metrics
There are dozens of performance, financial and non-financial metrics that you can keep track of. But not all of them will be as useful for you or your potential investors. Because of this, it makes sense to narrow it down and focus on the ones that are the most relevant in the eyes of your investors.
Here are some of the key metrics for you to consider:
- Runway: This metric keeps track of how much time you have until the amount of revenue that your startup generates makes it sustainable. A complementary metric to runway is Burn rate since it measures how quickly you are going through your cash.
- Trial to paid conversion rate: SAAS startups that rely on paid trials use this metric as an indicator of how effective their marketing is and what to expect in regard to their revenue.
- Return on ad spend (ROAS): If you’ll be relying on paid ads to acquire customers, then this is one of the key metrics to track. ROAS measures how much money you are getting back from each dollar you invest in ads.
Use Your Forecast to Inform Your Strategic Decisions
When you make a decision can be as important as the decision itself. In other words, the right decision is only effective when it’s the right move at the right moment. But how can you know what the right time to make a decision is? This is one of the answers that forecasts can help you find.
If you don’t have data to rely on then you are essentially guessing and hoping that something sticks. There are times when this is your only option, there simply isn’t any data to pull from, as is the case when your startup is at an early stage. But for everything else, you should use the data you have available to steer the course.
Better decisions improve your financial results
One of the key aspects that investors evaluate before investing is your ability to make decisions and steer the business in the right direction. Being able to correlate your financial results with your strategic decisions is one of the best ways to demonstrate how effective you are as a business leader.
Work With an Accounting Service that Understands Startups
As often is the case, startups don’t have the budget to hire a financial expert or a team of experts that will understand their unique needs. This is why choosing the right financial counsel can be a gamechanger in the growth of your enterprise. Understanding of your business model, the constraints with which you’re working and being able to pivot and adapt are some of the key characteristics your accounting service needs to have.
Being able to talk startup
The startup world has a unique lingo that is seldom used in other industries. Having a financial partner that knows and understands this language is important in making sure that you don’t come across any communication headaches down the road.
Being able to scale and grow at your pace
Startups are unique in that they can literally see exponential growth during certain time periods. Your financial partner needs to have the ability to grow and adapt quickly to your needs, otherwise you might have a financial bottleneck that can cost you dearly.
Financial forecasts are tools that can make a huge impact in your effectiveness and access to funding to grow your startup.
At Founders we have the experience and infrastructure to help startups get exactly what they need at every stage of their growth. Schedule a free consultation to talk about how Founders can help your startup.