How to Build a Financial Model for Startups and SMBsEditorial Staff
March 28, 2022
Not having a financially viable business won’t be good business after all, right? Whether you’re a tech startup or an upcoming cafe, building a sustainable financial model is indispensable.
What is a Financial Model and Why’s it Important for Startups and SMBs?
A financial model is the “business in numbers” equivalent of your startup’s objectives. It is an abstract numerical representation of how your business will work.
It shows past business activity, your present standing (using KPIs and metrics), and future business direction using financial forecasts.
Any startup’s financial model has inputs (driving assumptions) and outputs (projections based on the inputs). This encompasses variables like:
- Number of clients
- Number of employees
- How much do you pay them
- Churn rate
- Burn rate
- Customer acquisition cost
As the list indicates, the importance of having a financial model in place is not limited to forecasting the numbers but also making smart, game-changing business decisions in the short and long term.
Financial modeling can be complex and prone to inaccuracies. However, here are some steps to make a simple and effective financial model for your startup or small business.
How to Make a Financial Model for a Startup:
Microsoft Excel spreadsheets have been the go-to tool for financial modeling for a long, long time. Use Excel sheets to create your model, as many are familiar with them.
Add the following statements that investors are familiar with – an income statement, a balance sheet, and a statement of cash flow.
It’s best to speak the language of your investors and pour your heart and soul into the model by building it from scratch (instead of, say, relying on a readymade template that was probably designed for a different business).
Let’s discuss the steps involved in building a financial model for your startup.
#1. Determine the goal of the model
Incorporate enough detailed analysis to showcase your understanding of the market and get the attention of prospective investors.
#2. Determine the KPIs for your company
Study the industry-standard best practices and KPIs to lay down your own. Make sure they are quantifiable and trackable.
#3. Get a financial model template
A haphazard Excel sheet or a cheap template will do you no good. Look for an all-encompassing template that you can customize according to your business.
#4. Merge actual results into the template
For operating startups, it is important that you align your business results with the financial projections you had originally set out to achieve.
#5. Start with revenue
Depending on the type of business, get right into the numbers game and make sure you also highlight all the relevant revenue drivers that will come into play.
#6. Project headcount needs
At this step, you must factor in talent acquisition, recruitment, and the number of people you need to achieve your goals (along with what they will cost).
#7. Estimate other expenses
Account for all the possible (additional) expenses you expect to bear in the short and long run.
#8. Model working capital
As a startup founder, this is perhaps the most important thing you need to wrap your head around. You’ve got to have your wits about you when thinking about how you will model your working capital (the difference between your assets and liabilities).
Outline your cash flow, payroll, rent, infrastructure, and client billing and payments along with realistic timelines.
#9. Review your startup’s financial projections
Do an honest and unbiased assessment of your “projections summary” and ask yourself if it makes complete sense. Running it through a trusted peer or consultant and putting yourself in the investors’ shoes can help you get some perspective.
The above list might sound extensive and tedious (which it is) – but nothing is served on a platter when it comes to us startups, right?
Trying to build a successful startup or small business without a logical and defensible financial model is like going to war without a strategy (and ammunition) – you simply won’t survive.
At Prospur, we know what it’s like to survive and thrive as an SMB. And we made a simplified CRM platform so that entrepreneurs and business owners have fewer things to worry about and experience hassle-free operations.
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