Coming up with a Perfect Financial Model for Your Startup

As an entrepreneur, you may find yourself confused and extremely stressed about all the steps that need to be covered in order to properly get a startup going. Financial modeling is one of the most difficult parts of running a small business and a couple of words of advice can go a long way in helping you establish a strong and secure company.

A Financial Model – what is it?

At the risk of oversimplifying the general idea of it – a financial model is an abstract mathematical representation of how a company will work and go forward. The model usually consists of inputs and outputs, where inputs are assumptions – a driving force for the model (what drives your customer acquisition cost, your churn rates, distribution of pay, etc.). The set of projections that outline how the company will perform if the mentioned assumptions (inputs) are true are called “outputs”. Depending on assumptions, one model can, naturally, produce a variety of projections. Playing with the variables is pretty much the name of the game for the operators, when choosing a financial model – it’s not really about predicting the future, but it is based on making assumptions about it.

“Why should I Care about Building My Own Financial Model?”

Templates are everywhere – for example, instead of building your own website or hiring someone to do it for you, you can pay less for pre-made website templates and quickly establish your own company’s web presence. However, taking the time of finding the right person for the job (or learning how to do it by yourself) is always a better choice – people will notice the difference. The situation is quite similar, when it comes to financial models – the templates are built by someone who’s aiming at a particular business and every business is unique, as you probably already do know.

Additionally, it is crucial that you are well-familiarized with your model – this is the best way to ensure that someone invests in you; if your model seems unstable, or “unthought-through”, nobody is going to want to take a leap of faith as huge as investing in your startup.

On the other hand, you shouldn’t disregard the template financial models – you can learn a lot from examples in life, and this business bit is no exception.

How to Approach Founders with Business Models

Well, you should consider running a bit of a “con” here. Now, to make things clear, this has nothing to do with tricking your founders into financing you and then crashing and burning; but you shouldn’t outright mail them your model and hope that they’ll visualize everything that you have devised. It is important that you clearly outline that you have a very detailed financial model, but that you will show it to them only by sitting down with them and an associate and reviewing it in person. After this, they will be entitled to a copy of your model. Keep in mind, however, that contacting forensic accounting experts is a smart move in making sure that things are done right.

It Doesn’t Have to Be Right!

The very goal of any financial model isn’t to be exactly right with every projection, but rather to show that you have a handle on the things that impact the success (or failure) of your business idea. If the investors see that you’ve thought about things such as market share, adoption rates, competitors and so forth, they will appreciate this more than your model being right about every assumption.

The only thing more important than coming up with a perfect financial model is pitching it right – it may serve as a guideline and an outline of your financial plan, but its main purpose is showing your investors that you mean business!

October 25, 2016