Financial planning 101 for climate startups

Growing your business will almost certainly take longer and cost more than you expect - especially in the current market, where startups are having an incredibly difficult time fundraising. Having a watertight process around financial management is crucial to avoid running out of runway. So what practices should you implement, and what common mistakes do you need to be aware of?

Shivani Ganguly is the CFO and COO at New Sun Road, and has been a CFO for climate tech startups for 15+ years. We sat down with her to discuss how founders can lay the foundation of good financial management, tips for building an effective proforma, and why you should prepare for the worst case scenario. 

The basics of good financial management 

 1. An accrual-based accounting system
An accrual-based accounting system helps you understand when - and most importantly if - your business is going to be profitable. Without it, you won’t be able to accurately plan your operations. Let’s say you’ve booked a million dollars in contracts, but you’ll be delivering those products and services over the course of two years. 

If you account for that million dollars now - and present it as revenue you earned today - you risk overlooking the fact that you have a huge liability in terms of delivery against those contracts. If you don’t factor that into your future plans, it will come back to bite you! 

In addition, accrual based accounting helps you to understand your gross margin by matching your revenue to your cost of goods sold in the appropriate time periods. 

For these reasons, it’s best to implement an accrual-based accounting system - one which focuses on the most relevant metrics for your business and helps you to understand how they measure up against industry benchmarks.

2. Run a cash-based forecast in parallel
The downside of accrual accounting is that it can obscure the reality of your business’s cash position. For a transparent view of what’s coming in and out, run a cash model in parallel that you update on weekly or monthly basis alongside an accrual-based proforma model that you update monthly or quarterly. This cash forecast is crucial for understanding exactly how much runway you have left, so you can figure out in advance how you’ll bridge any gaps in your cash flow between now and your next round.

3. A strong (accrual basis) proforma
Good planning requires you to have clarity of your existing financial position and where you’re headed. Future-looking analysis is generally done within the confines of a proforma, i.e. a financial model that takes into account historical data, key business assumptions and drivers, scenario analysis, and more.

What to include in an internal proforma 

1. Financial statements
Your proforma must include the basic financial statements: the income statement (sometimes referred to as the profit & loss or P&L), balance sheet, and cash flow statement. Digging deep into the granular detail of each statement and thinking through the underlying assumptions is critical, as is summarizing the information in a way that is easy for your team and investors to understand. Most proformas show projections on a monthly and/or quarterly basis, over a three-five year time horizon.

The Income Statement helps you to understand the general health of your business – are your gross, operating, and net margins at or better than industry benchmarks? When will you get to a breakeven point (when your income can cover your COGS and operating expenses)? 

When preparing the Income Statement, think about how you want to track your incoming revenue. What are your products and services? In what units do you sell them? What are your current pricing and gross margin goals? How does your team have to grow and change with increases in revenue? What tools do they need to make your customers happy? 

The Balance Sheet tells you about the company's resources (assets) and its sources of capital (equity and liabilities/debt). This information investors and lenders assess ability to pay for operating costs, meet debt obligations, and make distributions to owners.

The Cash Flow Statements is arguably the most important financial statement – it tells you how much cash you have and when you may need to bring in additional funding. Make sure to map out your cash cycle in detail on your cash flow statement so you don’t run into any unexpected cash gaps.

2. Create structure for clarity
A good financial model has separate tabs for managing assumptions; the revenue model, based on units and/or customer contracts; headcount and operating expenses, fixed assets, debt amortization schedules, etc. etc. These detail tabs roll up to the financial statements described above. Some models also include a dashboard which shows key outputs in a visual format. This isn’t required but it does help with presenting the information in a way that lots of stakeholders can easily understand.

Having a separate sheet for your key assumptions and inputs is crucial to being able to quickly and easily update the proforma model. Without an assumptions sheet, you’ll end up with inputs sprinkled across your model in random places. This leads to a lot of grief as you’re doing scenario planning and sensitivity analysis!

A few more structural ideas:

• When you’re putting your proformas together, start by figuring out your revenue model, including the cost of goods, then work on headcount and operating expenses. Once you’ve assembled the income statement, map out your cash cycle and feed that into your AR, AP, inventory, etc. calculations to get to your cash flow and (eventually) the balance sheet.
• Use text colors to designate different types of cells – traditionally, green is for historical data, blue is for assumptions, and black is for calculations.
• To make it easy to update your financial model, align the structure of your financial statements with the chart of accounts from your accounting system. 

Remember, the goal with your proforma is to understand what’s driving your revenue and cash flow - whether that’s customers, units, or number of sites - and how your revenue relates to your COM/COGS and Expenses. A separate and well-organized assumptions tab will enable you to clearly define all the levers in one place and understand their interconnections. The value of this simple action is huge!

3. The model should tell a story
Think about what story you’re trying to get across, and tell it through the numbers in a way that’s cohesive and can be communicated to both investors and your other team members. Having a few different scenarios running is key - you’ll show investors your best case scenario, but internally you should be aware of what the worst would look like. To help investors understand the story, consider having a deck or memo that you provide with the model, explaining key assumptions and drivers. Providing notes in the workbook is helpful too – tell your audience not just what the assumption is, but why you made it.

It’s also important to remember that the proforma is telling a story that takes place over a period of time – use it to tell the story of how you expect your business to grow and change, not just as a snapshot of where you are now.

4. Track KPIs beyond dollars
Your business likely has a number of key indicators beyond revenue that you like to track. These might be sites you operate, the number of products you sell in a given product line, or your customers (disaggregated by size, and/or across your customer segments). Make sure you build your model to show these indicators as clearly as your revenue and costs. 

This is even more important for climate business. It’s a great time to tie in sustainability metrics and impact. For example, if you’re building renewable energy minigrids and your model includes information about site KPIs, and fuel-mix and energy use assumptions about those sites, you can start to model carbon impact at a high level. You can also look at people or communities served, or workforce demographics. By tying this into the model, you can make a truly triple bottom line assessment of your business, and make sure you're meeting your financial, climate, and social goals.

5. Update on a monthly basis
Update the model monthly, not just when you’re going out to raise money. Build an easy way to map from your accounting system to your proforma into the mechanics of the model. And do your best to make the model dynamic rather than static - talented modelers can build it to track your finances in real time.

Common mistakes with financial management

1. Budgeting for the best case scenario
Always expect that everything will take longer than you think it’s going to. If you estimate it’ll take you six months to raise a round, it’ll actually end up taking a year. This goes for everything from building and launching your product, to hiring, to getting your first sales. And, everything will also cost more than you think it’s going to. Even worse, those costs tend to rise every year! 

With good financial management, rigor and prudence are key. Don’t budget for the best case scenario - ask what the worst case outcome could be and plan for that. This is where having a dynamic model with multiple scenarios becomes really important, so you can easily swap and compare your base case, bull case, and bear case.

2. Budgeting in a vacuum
While each department head must own their own budget, a common pitfall is to take each of their budgets, add them together, and think that you’re done. Instead, think about the relationship between each expense and what drives change. For example, adding headcount in any department will increase your technology and facilities costs (if you have them), not just your payroll costs. Rolling out a new product line first requires investment in research, development, prototyping, a manufacturing test run, then a launch, and likely an ongoing increase to at least some of your marketing and sales costs. 

3. Extending payment terms on all sales
Consider taking deposits upfront, and not releasing your goods or services until you’ve collected the full amount. You might offer net 30 terms to established customers, but if you make getting paid in advance your default, it will go a long way towards making your business financially secure. As a startup, you might feel like you aren’t in a position to request this of your customers, but you’d be surprised. It’s always worth having the conversation.

Tips for successful cash management

1. It’s a relationship game
If you’re consistent at building relationships, you’ll always have someone to call when you’re in a tight spot financially. That one investor you’re counting on to back you might not follow through - you need to play the odds and keep multiple parties interested.

2. Finance is not just one person’s job
Everyone at the senior level in your business needs to be involved in finance in some way - at the very least, they need to know what your cash balance is and what your runway looks like. This may require you to translate that information into a form they can understand, and help them see how the financial outlook impacts the business at large as well as their own responsibilities.

3. Make the hard choices early
There’s a big gap between imagining the worst case scenario, and actually acting on it. Often entrepreneurs don’t want to accept reality - they wait to make cuts, lay people off, and make other hard choices until it’s too late. Entrepreneurs need optimism, but in reality, running a business is hard. As you work on accepting that, you’ll be better equipped to make these tough decisions when it counts. 

Shivani Ganguly has been the CFO/COO at New Sun Road P.B.C. since 2019, where she leads finance and operations. From 2018 to 2019, she was CFO at Credo, a leading clean beauty retailer. Shivani has worked in mission driven and sustainability focused organizations in tech, retail, and CPG, both internally and as a consultant, since 2010. Prior to that, she was part of the executive team that brought to market the world's smallest computer. She holds a BA from Stanford University in Science, Technology, and Society, and an MBA in Sustainable Management from Presidio Graduate School.