Building a startup financial model is essential for mapping your company’s trajectory. The model helps you understand your cash flow, identify areas of opportunity and make better decisions.
It’s a great way to estimate your business’s performance and how much money you’ll need to get it off the ground. In essence, a startup financial model is a tool that helps entrepreneurs, venture capitalists, and other stakeholders evaluate the financial implications of a business.
Your model can also indicate whether or not your business idea is viable and how much capital you need to start. Take a look at our step-by-step guide on how to create a startup financial model.
Follow These Steps to Create a Startup Financial Model
An entrepreneur’s success depends heavily on their ability to create a financial model. Essentially, it will help you decide if your startup idea is worth pursuing by allowing you to see what the business will look like in the future.
Although there are different financial models, they all carry core principles that all entrepreneurs should understand.
1. Select the Right KPIs
Start by identifying the key performance indicators (KPIs) that will measure the success of your business. Choose relevant KPIs that are easy to collect and track over time.
While you may have dozens of metrics that you regularly track, focus on a small number of essential ones. Consider those that best indicate your company’s performance and whether or not it’s operating as planned.
An excellent way to determine which KPIs are most important for your startup is by looking at other companies in similar industries and seeing what they track. Consider including the metrics they track in your model.
2. Create or Use a Financial Model Template
The next step in creating a startup financial model is to decide whether you want to create your own or use an existing template. You can download a template from the internet or take one built into Excel or Google Sheets.
Freely available templates can vary significantly in terms of simplicity. Some are easy to use, while others are more complicated. Select the one that best suits your needs and is closest to the business model you are pursuing.
Many online tutorials can help you figure out how to use your financial model template if you’re unsure. Or better still, seek a professional partner with startup finance experience.
3. Merge Actuals with Projections
Merging these two datasets is necessary because it allows you to see your business’s trajectory over time and how close your projections match up with reality.
Use the differences and gaps as an opportunity to make adjustments before releasing your financial report or presentation.
4. Begin with Revenue
To create your financial model, starting with the top line is best. Revenue and gross profit margin – what’s left over after COGS (cost of goods sold) – will help you understand how much you can afford to spend over time. This simple formula allows you to determine how much cash is coming in and how much it costs to run your business.
From there, you can subtract expenses to find your bottom line.
5. Take Employees into Consideration
Startups often operate with small teams, so it’s easy for founders to overlook employees in their financial models. But you should include them in your forecast – especially if they’re paid salaries instead of hourly wages or commissions. They may not stick around very long if you aren’t able to pay on time.
Employee benefits are another expense when calculating how much your company needs as seed capital.
6. Factor in Additional Expenses
Before calculating your total startup costs, don’t forget any additional expenses that might come up during operation.
Ongoing expenses like rent, payroll, and insurance or startup costs ranging from equipment purchases to permits, licenses, and software are easy to miss in your model but essential for getting your business off the ground.
7. Pay Attention to Working Capital
Working capital refers to the funds necessary for day-to-day operations, and many business models rely heavily on working capital. Knowing when you’ll get paid by your customers and when you’ll pay your suppliers and vendors is crucial.
For example, you may need to pay wages or a supplier while waiting for a customer payment. As a result, you’ll have to plan your cash flow accordingly.
8. Analyze Your Projections
To create your first startup financial model, you’ll need to analyze the projections of your company.
Start by analyzing how much money you’ll need to launch your business idea. Include the cost of:
- Starting up
- Acquiring customers
- Marketing campaigns
- Other expenses associated with launching your business
You should also assess how much money you’ll make from your product or service. What’s more, analyze how many customers you’ll need at certain milestones (i.e., six months after launch). Finally, do a reality check to see if your projections make sense.
Consult an Expert for Help Creating a Startup Financial Model
You’ve got a great idea for a business. But how much will it cost to get it off the ground? The company’s financial model is more than just a sales and expenses projection.
A startup financial model is an essential tool that helps you decide where your startup should allocate resources. It might also enlighten you on how much capital you need and when you can expect to see a return on your investment.
Savvy business decisions require a robust startup financial model, and here’s where Founder’s CPA comes in. Our experienced team of startup finance professionals will help you build a great model while providing tips for improving your startup’s performance. To get started, contact Founder’s today.