The Single Biggest Issue with a Startup Business Plan and Financial Model
Many entrepreneurs make a critical mistake when writing a business plan and creating a financial model: they stay at the macro level of total revenue, total expenses, and total earnings, and they stay at the summary level of Year 1, Year 2, etc. As a result, most business planning by early stage startup entrepreneurs is a total guess when it comes to the financial model.
One hundred percent of all Revenue and Cash come from selling an “offering”, whether that is a product or a service or a bundle of both products and services. And typically, 65% - 80% of all of expenses as a startup will be driven at the offering level.
Because of the importance of how much of a business model is driven by the sale of each unit of offering, entrepreneurs need to fully understand their business model economics at a unit level, including everything from the acquisition cost of each customer to the cost to serve each customer to the direct labor and cost of sales for each unit of offering to the gross margin per unit of offering to the cash implications of how and when the business collects from each customer, etc.
If a startup has a channel aspect to their business plan such as a store-based plan, entrepreneurs will also want to demonstrate their “per store” unit economics as well. No venture capital firms will invest in a startup unless it can clearly articulate how their business will scale along each core unit such as each offering, each customer, each store, etc. The overall financial model then, is just a rollup of all of the unit economics of all of the various offerings in a “bottoms up” fashion rather than a “top down” type of plan that doesn’t properly account for how the business is going to get there.
In a similar fashion, entrepreneurs need to build up their plan from month-over-month to quarter-over-quarter to year-over-year financial statements. Don’t make the mistake of presenting a simplistic plan of Year 1 through Year 5 at a high level. It’s the quickest way to get shut down. Startups need to know which month is their low point in cash, which month they breakeven, etc.
In addition, since most businesses sell a bundle of offerings and in many cases a mix of one-time sales models and recurring sales models, the ideal financial model will allow the flexibility of a multiple offerings for various types of products and services with different unit economics, such as a one-time device sale with multiple recurring subscription plans, or various products with different prices, costs, and gross margins.
And finally, the ideal financial model will allow those writing a business plan to easily change any of the inputs and see how those changes impact everything from the Income Statement to the Balance Sheet to the Cash Flow Statement.
The graphic above illustrates how each of the 15 distinct offerings in the Startup Financial Model can be modeled and that each can consist of a unique mix of any of the inputs and can be linked to other offerings in unique ways to build up the overall financial model in a way that is easy to input, easy to understand, and easy to change to develop various scenarios.