80/20, a golden rule in financial planning for startup

Building a financial plan for a startup is really important to have a chance to reach sucess. If you have a doubt about it, read our previous articles “Business modeling a startup without financial forecast ?” and “7 reasons to build a financial plan for startup“. We believe any entrepreneur should build a financial planning when launching a startup.

However, we have to admit that it looks like quite a hard task at first sight! A lot of entrepreneur don’t know much about finance and they usually have a lack of knowledge about their upcoming business. So they are afraid of having to model their business in complicated financial projections.

Yet, building a financial planning shouldn’t be a hard task for a startup. Why that? Because an entrepreneur should keep in mind the 80/20 rule when they model their financial planning. That means a financial plan should remain simple! Of course, simple doesn’t mean simplistic…

Let’s get deeper into why this 80/20 rule is so important and how to use it well to build a relevant financial planning.

Model the “big picture” of a business model and strategy. Don’t get bogged down in details! 

The real interest of a financial forecast is to help the entrepreneur building a business model and strategy. When building a forecast an entrepreneur will have to digg deeper in business details to understand underlying financial issues of the business : expenses, investments, revenues, profitability, cash needs, timing, … This exercice will always help an entrepreneur testing and improving both business model and strategy. Building a financial plan will hence help entrepreneurs to identify key variables of their businesses. It’s then easier to iterate with the “Lean Startup” methodology “Build, Measure, Learn”.

However, building the financial model of a business doesn’t mean that an entrepreneur needs to get lost in too much details. Why that? Because if a financial model is too complicated, it will become hard for the entrepeneur to well understand his own business model. Morevover it will multiply the uncertainty of the financial model (each variable being a part of uncertainty).

Instead, remember to build a financial plan with a few key variables that you can easily tweak and tune-up to design the best business model and strategy for your startup! With just a few variables, it will become easier to build a relevant forecast with few but strong hypotheses.

For instance, if you plan to sell various products, don’t forecast revenues for all of these products. Instead, try to minimize as much as possible the number of “revenue stream” by merging products in categories. It will be then easier and more relevant to forecast such a variable.

Have a look to these 2 articles if you want some tips on how to build your financial projections : 2 complementary ways to create a financial plan and How to forecast startup revenue and growth ?

Financial forecasts for startups are usually wrong estimations of future. So, remain simple when forecasting a wrong future!

Experience shows that almost none startup financial forecast survive reality, even for the most detailed one. This is why it’s important to remember being simple when building a financial projections. Too much details might become irrelevant. Keep the 80/20 rule in mind when building your forecast. Remember to focus on some key metrics that are relevant to your business model and your strategy.

However, this doesn’t mean, as some skeptical entrepreneurs think, that it’s not necessary to build financial forecasts for startups. It remains a great exercice to test and improve the business model and strategy of a startup.

Remember also that a complex financial model has greater chance to have calculation errors. That’s quite foolish to build a wrong financial forecast because of such calculation errors when trying to build a super detailed financial forecast… :) So please, stay simple and relevant!

Make it easy to understand for third parties (partners, advisors, investors, …)

Building a simple (but yet relevant) financial projections with some key business variables will make it much easier for third parties to understand them. It’s super important!

Indeed, you don’t build financial forecast only for you. Of course, it’s firstly an essential work for an entrepreneur to build a great startup. But then it usually becomes indispensable to share financial projections with third parties, like investors. A financial planning will help them understand your business model and strategy, as well as evaluate the relevancy of the work done by the entrepreneur to build these hypotheses for key business metrics.

So, a simple forecast will help them understand your startup project. They will also be able to easily play will key variables to test various scenarios. Remember that investor like to understand well startup projects before investing. They will appreciate if you help them understand easily your business.

You are now convinced to build a financial plan with the 80/20 rule in mind? Try our free financial tool, Business Model Forecast!

Business Model Forecast is an easy and free tool to build financial projections for startups. We have designed this financial model with the 80/20 rule inside to help entrepreneurs building easily relevant financial planning.

Try it out now for free : Free download Business Molel Forecast

Good luck with your startup project! :)

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