Hand pointing out the return and risk relation on a graph

What about the financial aspects of a startup

In the financial analysis of business startups, we distinguish three perspectives.

First, specifying the market you are aiming at and quantifying your revenue potential. Second, analyzing whether the startup has an economic healthy business model. And third, analyzing what it takes to build a sustainable business through a developmental process. These should be the core elements of the financial part of your business plan. You can use the following overview to compose this part of your business plan.

Market potential

To specify the market potential for your company you need a quantification of the following aspects:

  • What is the overall size of the market you are aiming at?
  • Can you quantify the different market segments?
  • Which market niches and customer target segments are you focusing on?
  • What is the revenue potential for your business?
  • How many customers will be willing to pay which amount per transaction for how many transactions?
  • Who will be your competitors and what is their revenue?

Business Model

A strong business model must be expressed in a potentially attractive Return on Investment. Return can be specified through profit margin on revenues. What is the revenue perspective for your business and what profit margin can you generate on these revenues? To analyze your business model, you need to specify:

  • Value proposition. Your solution to satisfy the customer’s need. What are you delivering exactly to your customers and how valuable is this for them?
  • Revenue earnings model. How will customers pay you? Do they pay per product? Or for the hours worked times an hourly tariff? Or will you use a subscription fee or a brokerage commission? Which revenue models fits the market and creates a fair and attractive revenue basis for your business startup?
  • Cost structure, specifying all cost components needed to run your business operations. These include variable costs like raw materials and operational labor costs. But also the fixed overhead costs you need as core infrastructure to facilitate your business.
  • Needed resources. Which fixed assets and working capital do you need to run your business? The needed resources appear in two ways in your business plan. They will lead to cost components, e.g. through depreciation costs on equipment. Next to that, a high level of needed resources leads to a lower Return on Investment, as a consequence of the high investment level.
  • Profitability potential. The comparison between revenue potential, cost components and needed resources forms one of the most insightful checks of business planning. Are you able to make a profit margin high enough to balance out the needed resources, leading to an attractive Return on Investment?

Building Business

To be able to build a sustainable business you need to lead your startup through the valley of death or survival. Critical analysis of all needed financial resources should form the basis for your funding plan:

  • Breakeven Analysis. What level of revenues do you need to cover all your fixed and variable costs? How much time do you need to get to that point?
  • Cashflow analysis. What is the maximum needed cash, if you combine the development of your operational business with the needed startup costs, investments in fixed assets and working capital for scaling up your business? Can you express your funding plan on a projected time horizon?
  • Scenario planning. How big is the impact of different revenue and cost levels on your breakeven point and on the total need for funding?
  • What are the funding opportunities and how will you utilize these to realize your funding plan?

Leach, J.C. and Melicher, R.W., Entrepreneurial Finance, 6th edition, 2016, Cengage Learning.

Osterwalder, Alexander; Pigneur, Yves. (2013). Business Model Generation. Hoboken, NJ: Wiley.

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