The company's ability to meet its financial commitments even in times of severe discontinuity is the main guarantee of the health of the business. This is why financial planning for innovation startups can translate into a significant competitive advantage.
Liquidity is the lifeblood of any company, which is why careful financial planning is the starting point for a successful business. The ability to properly meet payments with adequate cash flow allows the CFO to minimise financial burdens while effectively supporting organic business growth. Lack of financial planning in innovation startups can lead to revenue leaks which can be extremely difficult to plug in the long run.
Before we dive into the importance of planning, let’s understand the essence of effective financial planning for innovation startups.
The Fundamentals of Financial Planning
Financial planning is the tool that allows the company to keep income and expenditure under control while managing liquidity correctly. It is the complete analysis of an organisation's monetary processes and flows within the framework of a complex procedure, which consists of several elements:
1.Forecast income statement: This is the central element of financial planning. This document shows whether the company will be in profit and the size of this profit. The main element of the document is the sales plan, which indicates the amount of products or services that will be sold in a given period. Estimated sales prices are also attached to the sales plan in order to determine the gross profit. Subtracting the fixed costs (raw materials, wages) from the gross result gives the company profit.
2. Balance sheet: This sheet shows the development of assets and liabilities over the period under consideration, usually one year (financial year). It is divided into the components of assets (fixed capital, working capital) and liabilities (equity capital, provisions,).
3. Statement of financial requirements: The financial requirements plan identifies the possible need for investment and the extent of investment by quantifying the liquidity requirements. This document distinguishes short-term capital needs (purchases of materials and other ordinary costs) from long-term capital needs (purchases of machinery, vehicles and other durable goods).
4. Turnover planning: This document represents the estimation of future sales volumes (products, customers, related prices and quantities) based on experience values.
5. Investment planning: This document is used to check the appropriateness and future profitability of new investments to determine whether or not they are profitable and what financial instruments are needed to cover them.
6. Liquidity planning: This document compares expected income and expenditure over the period (usually 12 months) and gives an indication of when the financial means needed to cover expenditure should be available.
Short-term Vs. Long-term Financial Planning
Financial planning for innovation startups can be either short-term or medium- to long-term (3-5 years). The short-term plan makes it possible to identify liquidity problems in advance and to take appropriate countermeasures in good time. It is usually structured in monthly cash budgets (receipts and payments) and is characterised by a high level of detail.
Long-term planning, on the other hand, ensures the achievement of financial objectives not through simple adjustments but through sustainable optimisations over time and is realised by means of forecast budgets and infra-annual cash budgets.
Advantages of Corporate Financial Planning
Financial planning for innovation startups makes it possible to foresee the liquidity needed to cover the company's costs on the basis of accounts receivable (from customers) and accounts payable (from suppliers). Proper planning ensures the right financial balance between capital investments and sources, so that both expenses and investments are adequately covered. In addition to this, it also ensures the right monetary balance between income and expenditure, providing the company with the right liquidity.
The introduction of a benchmark indicator such as the DSCR (Debt Service Coverage Ratio) makes it possible to measure the financial sustainability of the company's debt, i.e. the company's ability to service its debts in the medium to long term. Continuous monitoring of one's situation and the implementation of proper financial planning are therefore the first step towards financial sustainability.
Key Benefits of Financial Planning
Financial planning allows you to know how much money you have at your disposal and how it should be spent by anticipating and resolving any liquidity problems in good time. It is, therefore, the main pillar of business sustainability over time.
- Financial planning for innovation startups helps the CFO to make optimised decisions on the timing and manner of cash receipts and payments, cash inflows and outflows.
- It helps them understand how the money flowing through the company is used
- And keeps cash flows under control, ensuring adequate coverage of payments while minimising financial burdens.
Who Benefits from Financial Planning?
The company's management needs to have a clear vision of the resources it will be able to count on in a given period of time - a fiscal year or three or five years. Implementing planned and predictive management allows the company to reach its economic goals more easily in an optimised financial management environment.
In the past, the main problem lay in the impossibility of having an overview, due to the inability to make the different systems on which the relevant data resided, such as ERP or cost accounting, sales and banking management systems, communicate with each other.
Today, the situation has profoundly changed. Data-driven tools enable intelligent and predictive cash flow management and have become an indispensable support for the CFO and his team, who are grappling with financial planning that is more complex and full of pitfalls than ever before.
Widespread digitisation provides the CFO with access to a vast amount of economic and financial data, quantities that can be more easily detailed and analysed in a more granular manner than in the past, to generate more precise insights and forecasts. This software allows the Administration, Finance and Control team to operate on consistent and coherent data, evaluating its different components to ensure that business objectives are met within a sustainable economic and financial scenario.
Advantages of Financial Planning for Innovation Startups
To be competitive, companies need to have a cash flow that is as constant as possible and always positive. Good planning and proper use of cash flow allow the CFO to implement more effective capital and investment strategies by making the best use of available cash, differences in exchange rates and differences between interest income and interest expense.
The new financial planning tools come on top of traditional budgeting, planning and forecasting activities to unbundle the elements that impact on financial processes and manage them in a centralised, optimised and future-proof way. The vision shifts from a traditional retroactive and forward-looking approach to a proactive and predictive one, which allows the CFO and his team to monitor in real time and understand the evolution of the business and financial scenario at an early stage. Thanks to the intelligent functionalities and algorithms of Advanced Data Analytics, startups are able to generate timely insights and forecasts on liquidity and the ability to meet your future commitments, gaining a significant economic advantage, which can easily translate into a strongly differentiating competitive factor compared to your competitors.
Financial Planning Tools & Software
The new EBA (European Banking Authority) directive, effective from 1 January 2021, obliges banks and credit institutions to supplement their risk governance system with a forward-looking control activity. The forward-looking approach is achieved by taking forward-looking assessments of companies' cash flow trends (forward-looking cash flow), which will complement assessments derived from historical creditworthiness. This is why companies can no longer do without financial planning software.
Administration, finance and control teams finally have at their disposal effective digital tools that allow them to reduce liquidity risk to zero. Platforms and services that offer projection and advance treasury and cash flow management capabilities. Solutions that integrate with management and remote banking systems, schedules and budgets to provide the CFO with the ability to optimise financial management while containing related charges.
The basics remain the same - cost accounting, planning, forecasting and budgeting - but thanks to financial planning tools it is possible to extrapolate relevant information and intervene quickly and precisely with a proactive, predictive and data-driven approach.
Finance management will be able to monitor business dynamics in real time, generate insights and forecasts through intelligent functionalities that exploit powerful mathematical data analysis algorithms. The optimised management of the time intervals between the economic manifestation of an event (purchase or sale, for example) and its monetary manifestation (monetary inflow or outflow) can translate into a significant competitive advantage for the company.
At Alien, we place utmost importance on developing thorough financial plans, both for our own operations and for our clients. Our dedicated team meticulously crafts detailed financial strategies that encompass various aspects, including a comprehensive project budget. Moreover, we extend our analysis to project financial projections for a minimum of five years, guaranteeing a comprehensive and financially stable approach.
In conclusion, financial planning for innovation startups is essential for the success and sustainability of the company. It provides a competitive advantage by ensuring the company's ability to meet financial commitments, manage liquidity, and support organic growth. Proper financial planning allows startups to maintain a positive cash flow, implement effective strategies, and gain a competitive edge.
- Alessandro Guerrucci
Chief Financial Officer, Alien Technology Transfer