The journey of a startup is rife with excitement, uncertainty, and countless challenges. To navigate this journey successfully, a startup must build a strong foundation rooted in financial management. A key aspect of this foundation is a three-way forecast – a holistic view of Profit & Loss (P&L), Cash Flow, and Balance Sheet. This financial triad can guide startups towards sustained growth and profitability.
Start with creating a robust, profitable P&L projection. As a startup, your primary goal is to reach profitability as soon as possible. This begins with understanding your expected revenue streams and the costs associated with generating those revenues. The P&L offers a snapshot of your profitability over a specified period, providing critical insights into your business’s financial health and indicating if your startup is on a path towards generating sustainable profits.
However, a startup’s journey isn’t just about reaching profitability—it’s also about maintaining a healthy cash flow. Remember the saying, “cash is king”? This statement holds especially true for startups, where cash flow can be the difference between survival and failure. Understanding and forecasting your startup’s operating cash flow, which excludes investing and financing activities, is vital. It informs you about your startup’s ability to cover immediate operational costs, pay employees, and manage uncertainties.
Simultaneously, startups need to strategically consider asset investments for longevity. Sure, short-term profits are important, but longevity requires strategic foresight. This might involve investment in product development, technology, talent, or even acquiring strategic partnerships. A forward-looking balance sheet, depicting your strategic asset investments, ensures your startup is poised for long-term sustainability and growth.
For founder-owners, consider the importance of factoring in a market wage for yourself before accounting for profits. Startup owners often juggle multiple roles, and this hard work should be compensated at market rates. Doing so provides a more accurate depiction of your startup’s profitability. The profit left after this deduction forms a realistic base for potential owner returns.
In sum, a three-way forecast gives startups a comprehensive financial compass to navigate their growth journey. By maintaining focus on a profitable P&L, healthy cash flow, and strategic asset investment, startups can set a strong financial foundation. Ignoring any of these elements may lead to a limited financial perspective, which can jeopardize your startup’s survival and growth. To paraphrase an old adage, “Fail to prepare your three-way forecast, prepare your business to fail.”
If you need help developing your three way forecast call the team at A&C – It’s what we live for!
