The terms financial budget, financial forecast and even financial projections are sometimes used interchangeably but have very different functions. They can seem overwhelming to startup founders, but their use is critical, especially in the context of cash management and fundraising. My goal with this post is to help you better understand each and offer suggestions on how to best put them to work in your business.
To start, what is a financial budget, financial forecast and financial projections?
A financial budget shows in financial terms where you aim to take the business. Generally speaking, a good budget reflects middle-of-the-line expectations and outcomes for the business. Typical you set your budget on an annual basis and will have it approved by your board of directors. It’s a helpful tool for your exec team and board to manage and monitor the business. For the early-stage company, one of the key insights it offers is how much capital is going to be required to sustain operations.
A financial forecast reflects current conditions and assumptions of where the business is heading. Unlike your budget, you will be updating your forecast throughout the year. Assuming you have the resources, you may be updating as frequently as every month. Why this is important, say for example the sales assumptions used in setting your budget proved to be incorrect (not uncommon). Having a forecast which reflects these adjustments will allow you to properly manage the business according to the new realities which are critical for successful cash management.
Financial projections in the context of this blog post are used in fundraising to show investors the potential future financial outcome of the business. A 5-year horizon is typical. Creation involves use of your budget and forecast data while adding additional assumptions.
Suggestions for creation and use of your budget:
Suggestions for creation and use of your forecast:
Suggestions for creation of your projections:
While there is a meaningful investment of time required to start building out your company’s financial budget and maintaining a forecast; you’ll find it pays dividends. The feeling of having a handle on your cash situation does wonders in reducing stress and will make for a successful fundraising experience.