Key Considerations in Financial Planning

March 16, 2009 at 2:13 pm

Thorough financial planning is viewed by many emerging firms as either too difficult, too ineffective, or overkill to be worth the time spent. However, it is my experience in working with over 50 Silicon Valley companies that failure to plan effectively can subject a company to serious unintended consequences; moreover good financial planning is a core competence that can help a company better achieve its objectives. Financial planning should always yield a “decision support” tool for the business that will be critical to evaluation of business alternatives as well as modeling what to do when business conditions change.

An Educated View into the Future
A firm with good planning will reflect a company’s view of the future. Knowable events, costs and opportunities will have been written down and the financial impact estimated in an effective way. In the absence of financial planning, many independent and disconnected activities will not be tracked or assessed leaving the business at risk of missing its key milestones, both financial and business. In my work, I have often encountered companies clearly running out of money (within only a few months) that did not know their true cash position. Also common is the expectation that raised money will last a certain length of time, when in fact careful planning would have shown that it will not.

One typical example from my client base was a software startup that raised $3M with the expectation that it could fund all of its development with the money, and that it could attract advance funds from customers during the development phase. Later, we learned that the client overshot its spending targets; further, the point where customers might provide funding was too far out to be helpful; and no allowance was made for the inevitable delays that occur in product development. Fortunately, we were able to arrange major debt financing and the follow-on Series B round was accelerated to meet the requirement though at a much reduced valuation. Today with money so tight, a firm might not receive a second chance.

Financial Planning Imperatives
Consider these points in your financial planning process:

• “Shake the tree” for all possible elements of your plan that will have a financial impact on the business. Missing key known spending objectives is often a reason for funds running out too soon. “Hip Shooting” is the opposite of Shake the Tree Planning and can be disastrous for firms without the resources to cover for mistakes.
• A well written multiple year spreadsheet containing income statement, balance sheet, cash flow statement and easy-to-update details will be the critical planning platform. This spreadsheet will integrate the many spending and revenue alternatives and provide easy to understand results. As CEO, you must understand how this tool works and the accuracy level of its results based on the quality of the inputs provided.
• Few managers will be able to write themselves a spreadsheet that will be needed for the planning platform. Working with planning professionals will be needed to assure that the results you seek are available to you. Avoid borrowing a spreadsheet the internals of which you may not understand and whose results may not be valid.
• Be sure to consider the less obvious planning elements. For example if you expect revenues, have you taken into account the period of time between invoice and the expected date of customer payment, often 30 to 90 days later? If the firm carries inventory, what turnover rate have you assumed and what will be your vendor’s terms of payment? Did you plan for capital investment needed to launch the company? Each of these elements can have a major impact on short and long term cash balances.
• Once you have the facts needed to make a decision, the model is the way you find out the cash and other impacts of the planning. Let’s say that there are several alternatives to solve a serious product engineering problem; one could be to hire several new engineers, a second might be to hire contractors to accelerate the project, a third might be to outsource the project either domestically or overseas and a fourth might be to do nothing. Using the model, the actual costs of each alternative can be viewed and the impact on cash resources and revenues can be predicted. This may lead quickly to the right alternative with all in management knowing the financial and business consequences.

Whatever your size or stage of evolution invest the time and secure the necessary resources to build an effective financial plan; then routinely use it as a business modeling and planning tool in the day-to-day management of the business. Such a plan need not be expensive or painful but operating without one can be. Do not neglect this very important part of your business until it is too late.

Rick Kadet is Vice President and Senior CFO Management Consultant with The Brenner Group, where he has engaged with over 50 valley firms as Consulting CFO or financial advisor over an eleven year period. Prior experience to The Brenner Group includes CFO and C level operational positions at Versant Corporation; InfoSpan Corporation;, Cadre Technologies, Inc.; and Sarama Industries. Rick began his career with General Electric Company and is a graduate of Arizona State University.

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