cash flows Archives - Fintech District

How can you monitor your business plan and what are the best ways to do this? We asked our mentor Daniele Testa (Partner of U-Start) who also gives us, in this interview, some good and bad examples. Read his tips and discover our mentorship program HERE

1) What does it mean to monitor your business plan in actual practice?

It means being capable of aligning all functions in the business, because in this way all efforts become evident in the business plan, like updating last month’s sales, the products costs related, the logistics and payment commissions, the marketing effort put in place to realize the revenues, and all the FTEs’ salaries down to the EBITDA level. Most important of all, especially in early-stage businesses, monitoring your own business plan means understanding and owning your cash flows, realizing how much the company is burning, and how many months the company can keep going at this burn rate. Ultimately, in order to establish the amount of money the company needs to raise, it needs to be able to create and monitor a business plan.

2) With which tools you can do this both today and in the future?

I’m agnostic with respect to the tools utilized. From the basic Excel to the tools provided by Electronic Invoicing, up to very expensive and complicated business planning tools such as Oracle Hyperion, or the e-commerce intelligence suites. As long as it’s being monitored, every business has its own effective way to do so. When speaking to potential investors, the best way is probably an Excel file, that shows P&L, Balance Sheet and Cash Flow Statement and groups Actuals, Budget and Forecast. In my opinion, this is the simplest way to show control over the financials of a business.

3) What risks do you run in not monitoring your business plan? What are some examples of failure to monitor?

Lack of control over the business plan has significant consequences on a company’s development. Not being able to foresee a significant cash outflow can result in the need to raise an emergency-bridge-round, where a founder must give away a significant % of equity at a discounted price. Even if the founder manages to raise it (there were cases of companies being flat for 6 months due to lack of cash), this outcome is a rookie mistake that can be easily avoided. Moreover, miscalculating short term financial needs can also result in having to down-size the organization, letting go of talented professionals. This has a direct effect over the mood of the office and will impact a company’s ability to attract talent in the future. On the “positive” side, not controlling your business plan can also result in missed opportunities: noticing unexpected savings might give the founder additional leverage to compete against such as cutting price, whilst still reaching the goals agreed with investors.

4) Let’s move on to best practices: any examples of effective business plans and their evolution?

In terms of best practices, the first example is a story from a founder. He used to work at Yoox, reporting directly to Marchetti. He told how Mr. Marchetti used to be obsessed by the Business Plan, and that he would call in the middle of the night, to figure out why there was a 3% discrepancy from the monthly budget. This founder is convinced this was one of the keys to Yoox’s success, as it kept everybody focused on the objectives to deliver. A best practice that I personally appreciate, is that of giving detailed financial monthly reports to investors, to check the ability of the company of meeting its financial goals. Investors paid the company a certain price based on the upside that the founder promised to generate. This kind of transparency is crucial to establish trust and to get the best out of the smart investors that everybody is claiming to look for, the people with knowledge of the Industry KPIs. How can they be of value, if they can’t see the numbers? Would you hire a mechanic, and then not let him see the engine of your car?

5) Are there any particular “alerts”/advice on the business plan that you think you should report for fintech?

With a degree of simplification involved, we can say that fintech companies, at the end of the day, manage money. From a FinTech startup, even at the seed stage, I would expect greater control over business planning and cash flow than I would from any other startup, because of this. A specific alert to FinTech businesses is that of trying to make their Unit Economics as understandable as possible for a potential investor, especially if it is not an investor “from the industry”. This will help in terms of potential exits, making it easier to communicate their upside with respect to existing solutions to an incumbent of the industry.

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