How Do You Create a Financial Model for a Startup?

Startup Financial Model

How Do You Create a Financial Model for a Startup?

Initially, any young startup should understand how the financial model is positioned. In a nutshell – it is a tool that helps in the process of ordering things and, of course, shows potential investors your company as profitable for investment. That is, this model contains a variety of indicators (both those that relate to money, and those that determine your future profitability), shows a plan for business development, including the time in which it will pay off, the rate of financial growth, and much more. In other words, creating a financial model is one of the main aspects that keep a company in the market. However, there’s a nuance: it’s not easy to make and it will take time. That’s why it’s worth enlisting the help of financial modeling startups. In this article, we will explain how to create a financial model for a startup and why it is worth working with the team you see in the link above.

What does the financial model consist of?

The first point worth mentioning is the individual approach. Unfortunately, there is no definite template when making a financial model, because the market you are trying to enter, the investor and you as the owner have a number of features that significantly affect the figures. However, a well-crafted financial model, one way or another, should have a “skeleton” on which everything else will be layered. So, it has several mandatory components with the results of reporting:

  • a forecast report
  • information on the effectiveness of the project and its evaluation in general
  • how the project responds if changes are made to its basic inputs. 

How does a professional team for financial modeling startups do all this? Let’s figure it out together. 

How do you create a financial model for a startup?

To begin with, the simplest step is to create a file that helps to prepare the work on the financial model. Ideally it should include three sub-items:

  1. Tab for the calculation part;
  2.  Another document inside the file should contain the drivers of the business case to make it easy to implement the changes, and  your future investor can navigate in the overall file;
  3. Next, a tab is created where the actual and main indicators will be located.

And the last document in the file should be created to facilitate the process of charting and showing financial and non-financial aspects. In this case, it is important to understand that this file is created for everyone to be able to use it: you, investors, outside experts, and so on. That’s why it’s worth deciphering every concept and figure within it. People who professionally create this file know how to properly describe it, so it will be understandable to everyone. 

Next, you need to identify and evaluate the work of the people and departments of the company and understand how cost-effective and efficient the strategy is being implemented. In other words, determine the KPIs. These are different for each startup, for example, for someone the goal may be to increase users, and for someone else the goal is to sell the product. It would seem that everything here is quite simple and easy. However, keep in mind that while there can be many goals, you should not overload your business model with them, because some of them can interfere with one another. 

All this work is done in order to find out what investors pay attention to, define the value that your users need and options for innovation that you can implement. 

After that, you need to prescribe the drivers that directly affect the results of the financial model. It is fundamentally important to divide them in this work into two types: basic (which are confirmed by a disinterested party, for example, the projected growth of the market); unreasonable (the result that you predict, such as conversion).  

It’s worth understanding that when working on a budget, you need to understand how you will monetize the product you offer, that is, to make a Revenue Estimation calculation. How is this done? Basically, you take the expected number of users and multiply it by the average rate of the check of such people. 

The calculation described above is not the only one of its kind, because you have to make another one extremely similar (Cost Estimation). In this case, you need to determine the cost of production. To do this, the figure of revenue per user is replaced by the amount of revenue sold units and multiplied by the cost of production. 

The last thing to do when building a competent financial model is to put the data in order and write it into the above-mentioned file. 

So, after reading this material, you can see for yourself that:

  • a financial model for a startup is a necessity.
  •  its creation is a complex and multi-level process with many pitfalls. 

The resource you have seen in the introduction offers services for building a business model. One way or another, you’ll be faced with finding a professional team to build your financial model. Remember, a poorly designed financial model can lead a startup to failure. Then the choice is yours.

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