Know thy financial plan, know thy business.

If you can’t build a strong financial plan, it’s unlikely you’ll ever build a strong business. 

But given its importance, I’m always surprised how little attention it gets from the founders and CEOs I work with. “Isn’t that something that my accountant does?” Please tell me you’re kidding. 🤦 

Here’s the bottom line – running your startup or business without a strong financial plan is like flying a plane without an instrument panel. You’re leaving way too much up for chance. Yes, you can have your finance person or accountant help you manage it, but you need to own the process as the leader of the business. Anything less is irresponsible in my view. 

In this article I’m going to explain exactly what a financial plan is and how it should be built. It’s part one of a three part series I’m writing about business financial plans. This information will be helpful for newbies and seasoned operators alike, as I’ve included lots of nuanced tips learned over 20+ years of running companies. 

Let’s dive in… 

What is a financial plan for business?

A financial plan is a detailed roadmap (typically a spreadsheet) that models the financial outcomes your organization expects to achieve over some period of time (typically annual). The financial plan forecasts revenue, expenses, profit and cash flow for the fiscal year, then breaks it out into months and quarters. It’s usually built in spreadsheet software – like Google Sheets (my preference) or Microsoft Excel. 

I like to think of the financial plan as a ‘numerical map’ that charts our path to success. It’s a critical part of the strategic planning process AND arguably the most important tool a leader has to manage the day-to-day operations of the business. 

It also has the added benefit of deepening your understanding of the business. If the financial plan is one big formula for success, the financial planning process forces you to understand and optimize every single variable in that formula. This gives you incredible command over your business which should be the goal of any great operator!

Financial plan building blocks:

While every company is unique, the best financial plans share similar “building blocks” regardless of business model or industry. I’ve identified seven that I use in any financial plan: 

1. Drivers – The key variables that feed your three core forecasts (revenue, expense, profit & cash). An example: # of qualified leads, pricing, sales win rate, # of sales reps, customer retention, etc.
   
2. Assumptions – The numerical expectation, or “educated guess”, of each driver in the financial plan. An example: Sales win rate = 30% for the year. 30% is the assumption. ‘Sales rate’ itself is the driver.
   
3. Annual Goals – The top three priorities of the company for the year. The financial plan should align with, and resource these priorities. This adds strategic context to the plan. An example: Goal = Move into the enterprise market. Given this priority, the financial plan needs to forecast enterprise performance for the year. This likely involves building new inputs to the financial plan since it’s a brand new strategy.
   
4. Revenue Forecast – The first core forecast of the financial plan. The revenue forecast is a projection of how much revenue the business expects to generate for the year, each quarter, and each month. If there are multiple types of revenue, it should include a forecast for each type. An example: subscription revenue, transaction revenue, service revenue.
   
5. Expense Forecast – The second core forecast. The expense forecast is a detailed estimate of all expenses. There are two main buckets, a) Cost of Goods Sold (COGS) and b) Operating Expenses. COGS is the direct costs associated with delivering your product or service to the customer. Operating Expenses are the ongoing costs to run the business, like sales & marketing (S&M), research & development (R&D) and general and administrative (G&A) expenses.
   
6. Profit & Cash Forecast – The third core forecast has two parts – profit and cash. The profit forecast is simply the difference between your revenue forecast and your expense forecast. The cash forecast then projects your cash flow and cash balance. Cash flow is how your cash moves in and out of the business. Cash balance is how much money you have access to at any given time.
   
7. Health Metrics – These are the key metrics that measure the health of your business. I always include ‘unit economics’ as part of this section. These isolate a single unit (or customer) and measure things like profitability, payback and lifetime value. 

Forecast vs. Actuals:

A financial plan starts as a forecast for the year (and for each quarter and month). Then, as you close out each month and quarter, you update the financial plan with your actual results (called “actuals”) and compare them to your original forecasts. As a rule of thumb, you always want your actuals to beat your forecast. This means you and the team are exceeding expectations – a great thing! 

But misses do happen. So it’s important to grade yourself honestly and objectively. Here’s the system I use to grade the company’s performance (forecast vs. actuals): 

🟢 = Achieved (actuals exceeded forecast) 

🟡 = Slight Miss (actuals missed forecast by 10% or less)

🔴 = Miss (actuals missed forecast by over 10%)

The best way to do this in a spreadsheet is to use conditional formatting, where the ‘forecast vs. actual’ cells (labeled Delta %) automatically turn color based on grade. Here’s an example of how this looks: 

In this example, you can see that our actuals for subscription revenue beat the forecast in Q1. But, our actuals for both transaction fee revenue and service revenue missed the forecast. Since subscription revenue was so strong this quarter, we still beat our top line revenue forecast by 2%.

When to make a financial plan for your business

Financial plans typically cover a 12-month period that aligns with your fiscal year (usually January through December). If your fiscal year is different, you’d adjust accordingly. Here’s a high-level view of the financial plan creation process: 

• Year 0: Sept – Dec – start building next year’s financial plan 
• Year 1: Early January – finalize and approve the financial plan for the year 
• Year 1: Jan – Dec – use the financial plan throughout the year 
• Year 1: Sept – Dec – start building next year’s financial plan 
• Year 2: Early January – finalize and approve the financial plan for the year 
• Etc. 

But remember, it’s never too late to make a financial plan for your business. If you’re midway through the year for example, you can still make a financial plan for the last six months. Then you’d create a fresh 12-month financial plan for the following year.

A ‘rolling’ financial plan

More advanced operators will sometimes use a “rolling financial plan” that forecasts the next 24 – 36 months on a rolling basis (instead of a 12-month period that gets refreshed each year). This type of financial plan adds new periods as old ones pass. For example, as you complete a month and update the actuals, you’d forecast a new month on the back-end of the model. This gives the company a continuous view of the next 24-36 months at all times. 

But I’d recommend nailing your 12-month financial plan first, then advancing to a rolling 24-36 month forecast. The building blocks between the two are exactly the same. The difference is simply the length of visibility into the future.

Who’s involved in a business financial plan 

A financial plan should be owned by the CEO, or leader of the team. Ultimately they are the one who’s accountable to the forecast and results that follow. However, it’s important that the CEO seeks input from the various leaders across the company. For example: the revenue drivers, assumptions & forecasts must include input from the head of sales and/or head of marketing. Why? Because…

• They are closest to the numbers
• They will be responsible for results 
• They need to be bought-in to the plan
• They need to believe the plan is achievable

The CEO also employs help building and managing the financial plan. This usually comes from their head of finance and her team. It’s common to have several people working on closing the books each month and quarter and inputting the actuals into the financial plan itself. But less is usually more here. You want a small group of trustworthy people (or automations) updating the financial plan to avoid mistakes and broken formulas. The circle can widen for viewing access though. I typically give my leadership team full viewing access to the financial plan because it helps them run their business better.

However, a word of caution. The most sensitive part of the financial plan is the labor and salary information. This is usually located on its own tab. So you can password protect this tab (if the spreadsheet allows) or keep this information anonymous and higher level. 

Seeking Board of Director’s approval

Many companies – especially corporations, venture backed startups and public companies – require the Board of Directors to sign off on the annual financial plan. Here’s the process I recommend: 

1. Preview next year’s goals with Board & seek feedback (October / November)
2. Send near final financial plan for review & feedback (December) 
3. Incorporate December actuals (first week in January)
4. Send for final approval (first or second week in January)

Note: This assumes your fiscal year is January through December. Adjust accordingly if not.

How to make a financial plan for your business

Most financial plans are built in spreadsheet software – like Microsoft Excel or Google Sheets. I prefer Google Sheets because it’s easier to share and collaborate with my leadership team and Board of Directors. Google Sheets used to have limitations, but I don’t find any serious functionality missing anymore – so that’s my go-to. 

I. Financial Plan Tab Structure

Let’s start with the tab structure. I like to organize my financial plan in a way that mirrors the 7 building blocks (discussed above). Here’s my most common set up: 

• Tab 1: Summary (incl. forecast vs. actuals)
• Tab 2: Drivers, Assumptions, Goals
• Tab 3: Revenue Forecast
• Tab 4: Expenses Forecast 
• Tab 5: Profit & Cash Forecast 
• Tab 6-X: Supporting tabs

Here’s what this looks like:

The Summary tab rolls up your three core forecasts and includes the following three elements: 

1. Profit and Loss summary 
2. Cash summary
3. Health metrics

And unlike the other tabs, it also includes your forecast vs. actuals comparison (since the Summary tab is a roll up of all other tabs, you really only need it there). 

Now onto the supporting tabs. These tabs are used for the inputs to your three core forecast tabs (revenue, expenses, profit & cash). You could have zero supporting tabs, or you could have ten supporting tabs. It just depends on how you want to isolate each input and how complex those models are. If they are remotely complex, then you’ll want them on a separate tab to keep the core forecast tabs as clean as possible. 

For example, the Revenue Forecast tab for my company Classy, had the following supporting tabs that fed into it: 

1. Demand generation model – forecasted leads and qualified leads
2. Sales team capacity model – forecasted sales bookings at the rep level 
3. Transaction volume model – forecasted transaction volume across the platform
4. Retention model – forecasted customer retention and customer expansion 

I used the numbers in each of these tabs to build the Revenue Forecast (like variables in a formula). Revenue Forecast = Inputs from Supporting tab 1 + Inputs from Supporting tab 2 + etc. 

Remember, Classy is a B2B SaaS company so its supporting tabs will be somewhat unique to that business model; however, every company will have supporting tab inputs that feed their three core forecast tabs (revenue, expense, profit & cash). 

II. Financial Plan Columns & Time Periods

At the highest level, your financial plan should forecast your fiscal year (a 12-month period). But you also need to break down the annual forecast into quarters and months as well. 

This means that when you’re building out the financial plan (and each tab within), you’ll need to have columns for each quarter (Q1 + Q2 + Q3 + Q4) and each month (Jan, Feb, Mar, etc.). Each quarter is the sum of the three months within it (i.e. Q1 = Jan + Feb + Mar) and each year is the sum of the four quarters within it (i.e. Y1 = Q1 + Q2 + Q3 + Q4). 

Then you can roll things up on the Summary tab so you can easily see your forecast for P&L, Cash and Health Metrics by quarter and month, all in one place. 

Since you’ll be adding actuals on the Summary tab, you’ll want to make columns for those too. This allows you to quickly compare your forecast vs. actuals across any month or quarter, and also see the year-to-date (YTD) annual summary as well. 

Here’s how the columns typically look on my Summary tab. We’ll use ‘Q1’ as an example for the time period, but you’d have these same four columns for every month and quarter throughout the year: 

• Q1 Forecast, abbreviated as Q1 (F)
• Q1 Actuals, abbreviated as Q1 (A)
• Q1 Delta Percent, abbreviated as Delta %
• Q1 Year-over-Year Percent, abbreviated as YoY %

Here’s what it looks like in Google Sheets:

Delta percent takes the percent difference between the forecast and actuals. Sometimes this is called Variance %, or Var %. Either way, use the following formula to calculate:

Delta Percent = (Q1 Actuals – Q1 Forecast) ➗ Q1 Forecast X 100

So, if your Q1 revenue forecast was $800,000, and your Q1 revenue actuals came in at $814,000, your Delta % would look like this:

(814,000 – 800,000) ➗ 800,000 x 100 = 2%

Year-over-Year Percent calculates the percent difference between actuals this year and actuals last year during the same period. So, in this example, it would be Q1 this year vs. Q1 last year. This lets you see annual growth across any metric. To calculate, use this formula

(Q1 Actuals This year – Q1 Actuals Prior Year) ➗ Q1 Actuals Prior Year

So, if your Q1 revenue actual for this year was $814,000, and your actual for last year was $506,000 (the number I used in this example), your YoY % would look like this:

(814,000 – 506,000) ➗ 506,000 x 100 = 61% year-over-year growth

III. Financial Plan User Experience

I treat my financial plan like a product – placing high importance on the user experience (UX). Why? Because the financial plan isn’t just for you. It’s a powerful tool that should be leveraged across your leadership team and Board of Directors (at minimum). So, if a stranger can’t figure out how to navigate it, or how you calculated things, then it becomes far less effective. And, if you share a sloppy financial plan with your team, Board or investors, it sends a negative signal about your ability to operate the company. 

Here are a couple of design ideas to ensure your financial plan is top notch:

1. Keep each tab clean – we discussed tab structure and labeling above. Make sure each tab has a clear purpose, the structure is easy to follow and the contents aren’t too long. I also like to color my tabs so its even easier for someone to navigate and understand importance. I color tab 1 and 2 in one color. Then tabs 3 through 5 in another color. Then all supporting tabs I keep in neutral gray. This tells someone which tabs go together and which ones are most important to view (the first two, then middle, then last).
   
2. Don’t ignore formatting – It may sound trivial, but spreadsheet formatting is actually quite important for legibility and navigation. However, less is usually more here. You don’t want to over-design your spreadsheet with a bunch of fancy stuff. You want things clear and concise. Make sure the font is easy to read and the important columns and rows are well defined. There’s also some nice templates you can find for Excel and Google Sheets. Ditch the structure of the template, but keep the formatting you like.
   
3. Don’t hard code numbers – Most cells in the model will have formulas that pull from somewhere else. There’s nothing more annoying (and amateurish) than removing the formulas, or just typing numbers directly into a cell after calculating them elsewhere. The formulas make up the logic of the model. If you remove the formulas, an external viewer will have no idea where the numbers come from.

How to manage a financial plan 

First you create your financial plan, seek approval (if needed) and launch at the beginning of your fiscal year. Then you manage your plan throughout the year which includes things like updating actuals, communicating results and sometimes a re-forecast.

Comparing your ‘forecast vs. actuals’ is a critical first step in managing your financial plan. As you close out each month and quarter, you update the financial plan with your actual results (called “actuals”) and compare them to your original forecasts created at the beginning of the year. Here’s what the process might look like after the close of a month:

1. Enter monthly actuals into financial plan Summary tab, ‘Month (A)’ column
2. Compare the forecast number in column ‘Month (F)’ to the result in ‘Month (A)’
3. Take note of any misses (variances) and find root causes
4. Review with leadership team and create action plan to correct
5. See what actions work and incorporate into operating rhythm

i. Setting the right expectations

Most leaders miss their forecasts because of one simple fact – the numbers were never realistic in the first place! But how can this be? 

• The leader is overly confident and aggressive;
• The leader doesn’t understand their business well enough; 
• The leader caved to pressure by the Board and/or investors. 

All three scenarios lead to big misses throughout the year, and a cycle of low confidence and morale throughout the organization. And when the wind comes out of the sails, it’s really hard to get it back.

One of the concepts I teach in my founder community, Highland, is this idea of “calling your shot and hitting it”. This is a cultural mindset that the leader must instill across the organization. When all teams continuously hit their forecasts, trust goes up and momentum flows across the organization. 

This doesn’t mean sandbagging everything. But, forecasts should be credible and conservative. Something you and the team can actually achieve and are expected to hit. Misses will still happen, but they will be smaller.

Speaking of misses. Do you notice anything weird about the misses in this example?

Take a look at the year-over-year percent column. The highest revenue growth area was transaction fee revenue (a good thing!); yet, this is the one that had the largest miss. Strange. This tells me that the forecast for this particular line item was too aggressive to begin with. The other two line items were forecasted to grow 50-60% year-over-year, but we were forecasting transaction fees to grow by 100% year-over-year! It’s ok to be more bullish in one area over the next. But in this case, based on the results, it looks like we should have been more conservative in our transaction fee forecast.

ii. Missing small, not big

When you do miss, you want to “miss small” so it’s easier to recover. This means missing by less than 10%, or missing a smaller component of the forecast, but still hitting the important top line components (revenue, expense, profit, cash).

At the company I founded Classy, this could mean hitting our revenue forecast by beating subscription revenue yet missing transaction revenue (Classy is a B2B SaaS company). This is similar to the example I showed above. The most important thing is hitting revenue overall, but it still means we would have work to do in the area we missed. This scenario would be considered “missing small”. 

“Missing big” would be missing your top line numbers by over 10%. If you miss big in any month or quarter, it’s harder to recover and still hit your annual numbers. This is why it’s important to reduce the variance of your misses across the board. Miss small and you can still recover the next month or quarter and have a great year! 

But the key with any miss – big or small – is to a) own it, and b) ensure you and the team are learning from it and responding. If you missed your forecast one month or quarter, you should try to fix that area by the end of the next period. If you adopt this mentality, you’ll drive continuous improvement and put yourself in a great position to hit your annual numbers by the end of the year. 

iii. Financial Plan “Outlook”

If you ever listen to a public company earnings call, you’ll often hear the CEO or CFO talk about the “outlook” for the next quarter or full year. An outlook is an updated projection for some future period (typically the full year or a future quarter). It’s not a formal change to financial plan, it’s updated guidance based on what’s happened so far, and what you see happening for the rest of the year.

The outlook combines year-to-date (YTD) actuals with a view on how the future period(s) will turn out. You should have a new outlook for revenue, expenses, profit and cash after each quarter closes. For example, you might say something like this:

“After seeing Q2 profit, our outlook for the rest of the year has increased by 10% compared to our original profit forecast.”

This means that the company expects profit to be 10% higher for the year because of the strong results in Q2 and their view of what Q3 & Q4 will produce.

iv. Financial Plan “Re-forecast”

A re-forecast on the other hand, is a formal change to the original financial plan. It signifies that the original numbers can not be hit and the company needs a new baseline to operate to. If the financial plan was originally approved by the Board of Directors, then a re-forecast likely needs a second approval. Here are a few scenarios where it might make sense:

• Significant underperformance – your actuals were significantly off from the original forecast.
• Market changes – something fundamental changes in the market.
• Strategy change – the priorities (company goals) change and you need to pivot.

To be clear, all three of these scenarios are rare and should not be taken lightly. You never want to move the goal posts around just to manufacture success. But if you must proceed with a re-forecast, here are a couple tips:

1. Never delete the original forecast. List your re-forecast next to the original in the financial plan.
2. Communicate the ‘why’ behind the re-forecast very clearly to your team and Board;
3. If your annual goals changed, make sure the re-forecast aligns with these new goals;
4. Look carefully at your expenses and consider cuts. Re-forecasts usually signal trouble.
5. Adjust company-wide bonus structure to align with the re-forecast numbers.

The better you get at “calling your shot” for the year, the less likely a formal re-forecast becomes. Keep your forecast credible and conservative and build momentum across your organization month by month and quarter by quarter. Let your small wins compound over time and watch the magic happen!

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I hope you enjoyed part one of this three part series on financial planning. When part 2 and 3 are done, I’ll add the link here and send them out on my newsletter. Sign up here and we’ll ship it straight to you!

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