The ‘Lean Start methodology’ dictates that entrepreneurs should take a ‘build, measure, learn’ approach when trying to build a startup company. Normally meant within the context of company strategy, many have come to the conclusion that financial forecasting should be viewed in a similar vein.
The truth is that most companies, regardless of their status, rarely come up with a financial model that’s aligned with the realities of their business. For large companies, entrenched ideas, unnecessary lines of bureaucracy and fluctuations in shareholder demand can make a sustainable model difficult to achieve.
For startups however, these problems rarely exist and whilst this doesn’t mean that they’re immune from the points mentioned above, they are certainly less susceptible to them.
One of the main reasons why startups fail rarely optimise their financial model early on is because that they don’t have enough data to accurately locate key drivers and variable costs. This improves every moment that a company is operating, so it’s important that a company remains vigilant and aware of what’s affecting their bottom line.
It should always come back to the company’s bottom line, and as a company develops, it will become clear that the metrics that you can define success by will change. Companies need to make sure that they are aware of this and that their assumptions never affect the company in a negative light.
Often when companies are trying to attract venture capital they are forced to create long-term forecasts, but in reality, they’re rarely that useful. It’s difficult to look too long term in startups, but when a company believes that they’re in a position to solidify their financial forecast they should make sure that they are aligned within the company’s longterm vision.
For startups, it’s more important to monitor the hear and now and whilst not forgetting about the future, they should put it aside to make sure that their financial model is optimised. By doing it this way, they’ll be able to make the most out of their capital.