Assumptions are Important
In other words, a financial plan is the place where you determine whether or not your business idea could possibly result in financial success.
To start a business without a financial plan would be like sailing out of port in a sailboat with no navigational tools and no idea where you are going. In the case of the sailboat, your life would be at risk. In the case of a startup company, any money or time you are about to invest is likely to go down the drain.
Notice that I am not saying you need to have all the facts before you launch your company. But you need to at least document the assumptions you are making about the business and verify that if those assumptions end up being valid you have a viable business.
In The Lean Startup, Eric Ries provides us with sound advice for starting a company: State your assumptions and then make many small iterations. For each iteration,
- Invest as little as possible
- Build a minimally viable product (MVP), i.e., build something you can show your customers
- Learn which assumptions are valid
- Pivot and repeat
As a metric for determining that you are making progress, Ries recommends using innovation accounting (IA). IA is basically checking that assumptions are being verified, the product is progressing toward viability, and the startup is learning – all good things.
I would add just two steps to his advice:
- Before you launch, build a financial plan based on your assumptions to verify that financial success is at least possible.
- At the end of each iteration, repeat the financial plan to verify that the revised assumptions are still sufficient to support financial success.
My advice makes sense only if creating a financial plan is not overly time consuming. The secret is to use a tool that supports automatic generation of financial statements directly from your business assumptions. By doing so, financial planning costs you little but saves you a lot.