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When you’re starting a business, you might have big dreams and a vision for the future. But dreams alone won’t pay the bills or keep the lights on. That’s where financial planning and analysis (FP&A) comes in. It’s not just for big corporations — it can make a huge difference in your startup’s success. In fact, nearly 29% of startups fail due to cash flow problems, underscoring the importance of good financial planning.

Why financial planning and analysis matters for startups

Starting a business can be thrilling, but it also comes with challenges. A good financial plan helps you pass those hurdles and keeps your business on track. It ensures you understand your cash flow, stay within your budget, and have a clear view of where you’re going financially. Startups that created formal business plans were 16% more likely to achieve viability compared to those without a plan. When you know your numbers, you can make smarter decisions and avoid nasty surprises.

At its core, financial analysis involves looking at your startup’s financial data to understand how you’re doing and where you’re headed. With these insights and careful planning, you can make your startup more resilient and increase your chances of success. Financial planning and analysis are key to not only surviving but thriving.

Related: 7 Easy Ways To Manage Cash Flow Surprises In Your Business

Budgeting

Budgeting is where it all starts. Create a budget that outlines your expected income and expenses. helps you allocate funds wisely and keep track of where your money is going. To get started, break down your budget into categories such as revenue streams, fixed expenses (like rent and salaries), and variable expenses (such as marketing and supplies). By organizing your finances in this way, you can easily identify areas where you may be overspending or where you can cut costs.

Research supports the value of effective budgeting. 61% of small businesses that have a formal budget believe it has a positive impact on their success.

To create a realistic budget, review your historical data, if available, and consider industry benchmarks for startups similar to yours. Make sure to set achievable financial goals and monitor your progress regularly. If you find discrepancies between your budget and actual performance, adjust your plans as needed to stay on track.

Cash flow forecasting

Forecasting helps you plan for different scenarios and see where your startup might be headed. While it might seem like you’re making educated guesses, forecasting relies on concrete data to help you understand where your startup might be headed. Companies are much more likely to outperform rather than underperform their predictions.

There are various forecasting methods you can use, such as trend analysis, seasonal forecasting and regression analysis. Each approach has its strengths, depending on your industry and available data. By combining multiple methods, you can create a more accurate and comprehensive view of your startup’s future. Regularly revisiting and refining your cash flow forecasts based on new data is essential. As your business grows and market conditions change, your forecasts should evolve accordingly.

To make the forecasting process even easier, consider using modern cash flow management solutions that offer built-in forecasting tools. These can streamline the process and help you stay one step ahead, ensuring you have the insights you need to make smart, data-driven decisions for your startup.

Related: 80% of Businesses Fail Due To a Lack of Cash. Here are 4 Reasons Why Cash Flow Forecasting Is So Important

Variance analysis

Ever wonder why your actual financial results don’t always match your plans? That’s where variance analysis comes in. It helps you compare your real financial outcomes with your budget or forecast, spotting any big differences. Did you spend more than expected or make less money than you thought? By using variance analysis, you can catch these discrepancies early and take action to fix them.

For instance, if your revenue is lower than forecasted, you might need to adjust your sales strategy or explore new revenue streams. If expenses exceed your budget, it could be a sign that you need to re-evaluate your cost management practices.

Scenario planning

What if your business booms overnight, or you lose a major client out of the blue? That’s where scenario planning comes in—it helps you imagine different situations your startup might face, both the good and the bad. By preparing for various outcomes, you can respond quickly and effectively when things change.

This proactive approach helps you make better strategic decisions and stay agile. So, take some time to play out different “what if” scenarios and plan how your startup would handle them. It could make all the difference when surprises come your way.

Related: How to Combat Payment Fraud and Negative Cash Flow

Key performance indicators

These metrics tell you how your business is doing in crucial areas like profit, sales growth, and customer acquisition. Tracking them regularly is like keeping your finger on the pulse of your business.

Businesses that use KPIs effectively are twice as likely to achieve their goals. By monitoring business KPIs, you can spot trends and make necessary adjustments before problems arise. Think of KPIs as your guide to making smarter, data-driven decisions for your startup’s success.

Getting professional advice

Financial planning and analysis might sound complicated, but it’s really about understanding your startup’s finances and using that knowledge to make smart decisions. Even if you’re great at numbers, it’s a smart move to consult with a financial professional. They can offer insights and advice tailored to your startup’s unique needs. Whether it’s a certified public accountant (CPA) or a financial advisor, having someone in your corner can make a world of difference in your startup’s financial health.

Originally published on Entrepreneur.com

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