Financial Planning

A financial plan is an essential part of your business plan. Develop a step-by-step, long-term financial plan to navigate your business’s constraints (time, money, regulations, certifications, etc.) and to achieve milestones (Gupta, 2018). Later, you will also need sales, operating, and marketing plans.

• Divide your plan into processes.
  Consider each process involved in starting your business, such as product development, clinical data, marketing research, recruitment of a development team, regulatory approval, sales manufacturing, etc. Processes will happen in different time frames, and many will overlap.

• Describe milestones, assumptions, and constraints for each process.
  • Milestones are objective and auditable achievements that add to your company’s value from your perspective and that of investors and customers. They may also reduce financial risk. Examples of milestones during early development include new research data, clinical data, or a new prototype. In later development, milestones include new beta customers, FDA approval, an agreement with a manufacturing firm, or a sale.
  • Assumptions are the foundation upon which you base the financial plan. You should have a solid basis for your assumptions, which should be quantifiable. For example, for a milestone of obtaining $1 million in sales, you may assume a certain percentage of potential customers will buy your product or service within the first three years based on your market research. Talking to customers, vendors, competitors, comparable businesses, and investors will help inform your assumptions. Be transparent with potential investors about your assumptions and what you base them on.
  • Constraints include time and money as well as regulatory approvals needed. For example, your proposed product may address a critical need but require FDA approval you can’t afford to obtain, or your product may cost too much to manufacture given the price customers are willing to pay.

• Determine your burn rate and costs for a year.
  Accurately calculate the burn rate, which is the amount of money your business spends per unit of time. You can use it to calculate how much money it would take to keep your company functioning for a year. You should have that much set aside in advance because it can often take a year to obtain funding, such as grants, angel funding, or venture capital. Describe your burn rate for each process, such as product development, obtaining clinical data, and marketing.

• Plan iteratively.
  Iterative planning involves coming up with steps to reach your goal, reevaluating after each step, and adjusting the plan as needed to reach the goal. For example, new research data, information from engineers, or recruitment challenges may affect milestone cost estimates. A particular investor may require that you achieve an interim milestone before they invest.

• Identify the cost to achieve each milestone and determine how much money to raise.
  To determine how much money to raise, add up the cost of achieving each milestone. Use various sources of data, and work with investors to determine the top milestones.

Tip: Form strategic alliances to reduce costs—for example, with other businesses. The arrangement is mutually beneficial, but each business maintains its independence.

Funding Gap (Valley of Death)

There is often a gap in funding between the initial funding received by a startup company and when it starts generating revenue. During this period, it is difficult to obtain funding because the product and business still need to be proven and because money is being spent to develop the product, obtain approvals, and market the product. The name valley of death comes from the fact that this is when many startups fail.

Example Solutions to Avoid Hitting a Fatal Gap in Funding

The following are examples of ways to span the valley of death successfully:

• Accumulate money ahead of time.
• Keep a source of income until you are through this period.
• Consider crowdfunding.
• Seek business grants and enter contests. SBIR grants are intended to help bridge this gap.
• Obtain loans or lines of credit.
• Seek funding from friends and family.
• Join an incubator for startups that offers cash, resources, and/or consulting.
• Barter service for service.
• Form a joint venture with an organization that benefits from your product.
• Commit to your major customer and offer perks such as meeting their requirements.