Creating a financial plan for a startup is not an easy task. By definition, a startup is a new business aiming to grow. It’s already pretty hard to predict the future for any business … and thus it’s even harder for a startup building a new business opportunity!
Hopefully, there are 2 approaches to create a financial plan for a startup that can greatly help any entrepreneur in this hard task : bottom-up forecast and top-down forecast. Bottom-up plans are based on startup ressources (ie, forecasting business results based on your capability to deliver with estimated ressources availability), while top-down plans are built on markets sizes & shares (ie, forecasting ressources needs to reach business results based on market share expectations). Both of these approaches have pros and cons. It’s quite common to see advises on how to create financial plans with one or another of these 2 techniques.
The bottom-up approach is usefull to create a consistent and reliable forecast based on tangible ressources. It’s usually the approach recommended to build a financial plan for “serious” startup. Nevertheless, this technique generally doesn’t suit well to show the long term potential of a startup.
On the contrary, the top-down approach is powerfull to show the potential of a business model. It’s a technique well used to create a financial plan for “ambitious” startup. However, this approach is usually criticized when used on its own, because it’s a fantazy way of predicting future and managing a strategic plan.
With our experience, we are convinced that the best way to create a good financial plan for a startup is to use both approaches :
1. Execution management : Short term forecast with a bottom-up approach
Using the bottom-up approach is a solid way to forecast a short-term financial plan. It’s a precise way to build factual business expectations based on a rational ressources plan. With a well balanced financial plan between funding and ressources capabilities, it’s quite easy to predict short term business results and goals to achieve.
Hence, bottom-up will help entrepreneurs working on their execution/strategic plan while managing cash flow precisely. This is the best approach to help entrepreneurs forecasting and managing their short-term visibility.
2. Business Model Ambition : Long term forecast with a top-down approach
The entrepreneur should then also work on a long-term forecast to show the real potential of a startup. Even if it’s harder to predict a distant future, it’s a good exercice to test and improve a business model, but also to convince others (financiers, customers, partners, …).
Top-down is the best approach to create a long-term financial plan. The entrepreneur will estimate roughly the market share he could expect in few years, regarding his strategy, to forecast hypotheses of business results. This approach helps to imagine the startup in few years, to validate its real potential.
Combining short and long term financial plan is a great way to work both on strategy and business model. Financiers really appreciate entrepreneurs capable of creating a financial plan with both approaches. It helps them understand how the startup will manage its cash while showing its future potential!
Remember! You can easily create your financial plan with our free financial tool “Business Model Forecast”, combining bottom-up and top-down approaches : http://www.businessmodelforecast.com
Good luck! 😉