Startup Financial Plan: Forecasting Expenses and Revenue

Most financial modeling looks like it is for the companies with stable traction, a defined team, and predictable revenue streams. However, when it comes to a startup financial plan, its financial reality differs significantly, depending on the stage. If you are an IoMT (Internet of Medical Things) startup at the idea validation stage, you already need investors and a solid financial plan. However, you cannot know your costs of sales, marketing costs, churn rates, or even potential revenue streams. You can only factor in things like development expenses, compliance costs, and operations costs to bring the initial MVP to market. Your financial model relies on assumptions, and the initial cash flow for startups like that will be negative for this stage.

As you move along the MVP route, your financial reality changes. You start getting actual market feedback, and you can begin to run different scenarios. Your financial model is likely to be dynamic, and with a maximum 3-year horizon.

Once traction becomes increasingly stable, you can finally generate traditional 5-year financial projections.

In this article, we’ll break down modeling a startup financial plan considering the MVP development roadmap. 

What is a startup financial plan?

In short, a startup financial plan looks like one in the image below. This sample is for a SaaS startup. Often, B2C businesses and earlier-stage startups opt for something simpler. In the template below, you have key elements, such as: 

• Revenues;
• Expenses;
• Cash flow;
• Assumptions;
• Yearly projections.

You can additionally include breakeven analysis, data on total addressable market (TAM), and do several types of projections – optimistic, conservative, and realistic. 

Revenues in Financial Modeling for a Startup

When it comes to revenues, a startup business model often takes a certain revenue model as a base. Then, as your MVP moves along, you can add revenue streams. This is why in the sample SaaS startup financial plan above, there are several revenue streams: subscription (base), subscription add-on, and potentially 3 others. They can be advertising, partnerships, and some features on a pay-as-you-go basis.

• If you look at the startup roadmap, first, you go through idea validation and launch a first lean MVP. At these stages, there might be no revenues at all, or only early traction. 
• After that, you get to the stage of refining your product-market fit, and it is where you get to supplement your base revenue stream with a closely related extra one. 
• It is usually on other stages, such as Scaling or Iteration & Expansion, when you add other revenue models. 

When you do sales projections, you make certain assumptions. In particular, projections that look like a “hockey stick” are rarely trustworthy, especially for investors.

According to Susan Schreter in FoxBusiness:

“Beware of the “hockey stick.”  The graph of a young company’s projected revenue growth line typically will be flat for some short period of time, and then rise sharply taking on the appearance of a hockey stick. The steeper the pitch of the hockey stick revenue line, the more investors will question the entrepreneur’s business judgment.”

“Hockey stick” projections can take place only if you have certain proof, such as:

• Major marketing campaign (including the ones with celebrities or large-scale influencers);
• New major partnership deal;
• Significant product/feature release (that has shown results in beta-tests or other types of customer-oriented testing).

Expenses in Startup Financial Plan

According to CBInsights, running out of cash is the primary reason for startup failure.

And running out of cash/failure to raise new capital has its primary drivers. One is poor financial planning. So, you can take care of it by applying ideas from this article immediately. Second is excessive spending. 

An Indian entrepreneur, Akshay Chaturvedi, co-founder of Leverage Edu, published in the Times of India, said:

“The 18-month-old startup could not afford to build a finance and tech team… I got to break even at a much earlier stage, thanks to approx 40% cost-savings achieved through outsourcing.”

Overall, a rule of thumb is to stay just the founder/co-founders as a team at the idea validation stage. Then, once you’ve proven the concept and move on to build your MVP, the ideal team size can reach up to 5 people max. More than that, and you are overspending (capital-intensive, medtech, deep tech, and such startups aside). 

Outsourcing is a way to keep fixed expenses low

All in all, outsourcing is often a key to success because it lets you stay flexible with expenses. You can scale up and down with minimal effort. If you put people on payroll, they become your fixed expenses; if you outsource, they are variable expenses. Outsourcing keeps your burn rate low and creates a longer runway effect.

Assumptions & Yearly Projections

Financial models are never exact and always rest on assumptions. Whenever possible, you should anchor your financial model into real data. It can come directly from operations, tests you run, or customer interviews/surveys. However, if the data isn’t available yet, you can use proxies. For instance, providing a subscription SaaS service, you may not have the full LTV value in the first year of operations. Therefore, you would use your existing data and industry average to calculate a proxy LTV.

When it comes to time horizons, a 5-year timeline is mostly suitable for an established company. Most startups often go for a 3-year dynamic model. It allows you to adjust your key assumptions as you get more data on your sales funnels, conversion rates, and unit economics. 

In addition, you can run scenarios. For instance, what if customer acquisition cost (CAC) rises by 20%? And similarly, what if it decreases by 10%? You can apply the same considerations to churn rates, conversion rates, and growth indicators as they shift your burn, runway, and break-even points. 

Overall, assumptions that are both credible and account for different scenarios are more persuasive for investors and actionable for you. 

Total Addressable Market (TAM)

The Total Addressable Market (TAM) in a startup financial plan shows how much revenue is possible to make if the company captures the entirety of the market it enters. This is an essential figure for investors and VCs as it shows the ‘ceiling’ of where the business can grow. So, basically, they want to know if they ensure strong execution, then after 3-, 5-, or 7-year horizons: “Would it be a $500 million business or $5 million one?” 

For example, you’re building a SaaS startup that provides AI-enhanced services to help mid-sized e-commerce companies with their logistics and shipping costs reduction. The TAM in this case is the total annual spending of such companies on logistics software. As such, the total logistics software market for North America is estimated at $5.6 billion in 2024, and it has a CAGR of 12% (annual growth). Around 29% of that market belongs to e-commerce, and 65% of that is held by large enterprises. This leaves you with the TAM of $568 million for 2024. And in 7 years’ time, the TAM would be $1.26 billion, considering CAGR. 

Startup Financial Plan for Idea Validation Stage

For the majority of startups, this stage is relatively short, between 1 week and 1 month. Moreover, it is often self-funded by the founders. Depending on the business nature and its goals, idea validation can consist of one or more test cycles. 1 test cycle can be 1 week, 2 weeks, or a month. Self-funded budgets can vary from a couple of hundred dollars to a couple of thousand. 

So, in a startup financial plan, at this stage, the variables are: 

• prototyping costs;
• marketing spend;
• available cash;
• revenues (optional)

For instance, you can launch a survey with free tools and there will be only the spend for promoting this survey. This test set-up will have no revenues. 

Or, you might want to pay designers for branding and design assets, pay for a landing page, and ads. If you launch a pre-sales test with that, then there is a possibility of revenue. Though if you don’t hit the target pre-sales goals and have to pivot, you generally will need to refund the collected pre-sales. 

The Idea Validation Stage: Financial Considerations

The financial model depends on the following variables:

Who is it for?

This is the lean type of financial modelling, which is mostly useful for:

• Lean startups;
• Bootstrapped startups;
• B2C startups;
• Pre-seed teams or those raising money from family & friends;
• Lightweight startups (SaaS prototypes, content platforms, mobile apps) – those that can be validated in weeks.

However, if we talk about capital-intensive businesses with hardware side and regulatory compliance, new departments of corporates, or deep tech, their startup financial plan is often in a different league. There, you will go a more traditional route, looking at 1-, 3-, and 5-year horizons, even though you are at the idea validation stage.  

Startup Financial Plan for Launching First MVP

At this stage, you still have little to no actual data, and rely on assumptions and proxies from tests, experiments, and industry standards. However, this stage already has figures getting closer to reflecting the startup’s financial reality. 

Financial modeling at this stage is done for a 6-month period, sometimes up to 1 year. The variables that inform the startup financial plan at this stage are given below.

Conservative projection – erring on the side of caution and factoring in the worst-case scenario

In the table above, the runway is calculated based on the conservative projection. Meaning, we assume that we won’t hit the upward trajectory right away. It can happen due to several reasons, often due to high churn. Idea validation helps to develop an offer to grab the user’s attention – meaning sign-ups, first purchases, and initial conversion. However, the interaction with the real product often requires further work to retain users.

Cash Flow for Startups

The table above shows an example of an ideal SaaS startup – lean cost side, healthy conversion rate, and a bit optimistic churn rate assumption. To model a cash flow, it is worth doing a breakdown by months within this 6- to 12-month period. In addition, you have to factor in that until launch, there will be no MRR at all, only operating expenses. Which is why time is of the essence when it comes to launch and cash flow.

Cash flow is like the lifeblood for any startup. It tracks the incoming and outgoing money across time. For a SaaS subscription-based startup, it is relatively predictable. This is why the subscription model is so popular. However, in case you are a high-ticket business or depend on sales, you will have different considerations that will impact your projections for cash flow for startups considerably. 

• In a high-ticket business, you need to know how fast your marketing & sales expenses pay off – the payback period. You might need to invest for months moving a customer through your funnel before you actually receive the revenue. 
• With e-commerce, there is a seasonality factor. 
• With capital-intensive businesses, such as IoT and IoMT, where you create your custom hardware, cash flow heavily depends on investment into manufacturing hardware parts, delays across the supply chain, and legal compliance. 

Final Thoughts

Financial modelling depends on the startup stage:

• At the idea validation stage, startups plan in test cycles for a horizon measured in weeks. 
• Launching your first MVP stage implies a 6 to 12-month financial plan. 
• Then, refining your product-market fit is best suited with a 3-year dynamic financial model. 
• Finally, scaling and iteration&expansion are a good fit for a 5-year financial projection.

A startup financial plan includes revenues, expenses, and cash flow statements. 

Cash flow for startups is an essential factor. Startups mainly fail due to running out of cash. That happens due to a lack of financial planning or overspending.

Revenue forecasting at early stages is based on proxies, and ‘hockey stick’ projections often raise doubts among investors. Still, assumptions and proxies can be a great source for running different scenarios and making three major types of projections – optimistic, conservative, and realistic.

Lean financial model strongly advocates for outsourcing. This allows founders to reduce fixed costs in favor of variable costs while there is only early traction and no stable revenue streams.

FAQ: Startup Financial Plan: Forecasting Expenses and Revenue