How important is financial planning to running a venture backed company?

A great deal of my CFO consulting practices relates to financial planning in venture backed (and hoping to be venture backed companies). There is a growing recognition that poor financial planning brings poor and unpredictable results to an emerging business.

On a number of occasions, I have been brought into a firm, installed financial planning models and tools, and quickly learned that management was about to run out of money and did not know. I am often surprised by how large some firms get without anyone taking responsibility for looking forward to see the obvious, but for only having useful tools for forecasting and using them. Even venture boards of directors do not ask for forecasts, and sometimes even for financial statements themselves.

If you are running a venture backed firm, it is essential that you install a financial model to allow you to see and measure your cash burn and remaining months cash. You must be judging your actions in your business by their financial impact before you initiate the action. Your model will enable you to do this informed decision support. When going to board meetings, take the results of your model and show the VC's how their money is being and will be spent. This will certainly inspire more confidence in them than keeping them in the dark.

Over the years, I have probably completed 30 or more models for client companies. Almost universally these firms find out in the process important facts about their business that fixing was critical to moving forward. This can be in the areas of lower than plan margin, higher sales commissions and costs, unprofitable partnerships, you name it. If you model it, you will find out the economic consequences before taking final decisions.