The financial model of your startup business measures the overall goals you have for it. It covers almost every aspect that you will incorporate in your business to run it. The purpose of creating a startup financial model is not to depict the actual events. Instead, the variation between the actual and forecast will offer you a better understanding of how to improve your business.
With better insight into your business, you can work on making important decisions for its development. But to ensure the viability of this, you need to polish up your basics of financial modeling. Here, you will understand how to work on your startup’s financial model and all the aspects you need to consider.
Starting your business requires a lot of research and planning. The same goes for your financial models. You will have to consider a range of things once you decide to start your business. So, you will have to figure out the answer to three basic questions before you go on to creating your model.
Firstly, have you set all your financial goals for your business? You need to know the reasons behind building your models. Starting without a clear indication of what you need will put you off track. Are you creating your financial model to attract more investors? Do you need to test whether your product is worth all the cost and planning? Do you need to create a budget? Make sure you’re clear about why you’re creating your financial model to achieve the ultimate result.
Secondly, you will have to answer whether you have established your business KPIs or not. Your startup financial model will run on important metrics, so you need to ensure that you are crucial for your business. Without this, you won’t be able to measure your business performance.
It is not only an essential part of your financial model, but you will also require this to measure your overall business performance. These will include the net profit margin, current ratio, and other important elements of your business. These you can figure out through your startup financial model.
Lastly, try to figure out alternative methods to create your financial model. Try to make things easier for you when it comes you creating your financial model. If you can access a financial model template, then half of your problems will resolve with it. You will not have to go through extensive preparations to create your financial model. Instead, you will have a template of it ready for your use. Doing so will reduce time wastage and improve your efficiency in creating your startup financial model.
The right budget can help ensure that you meet your targets. Moreover, your business will not run out of cash with a properly constructed budget as well. Your cash inflows and outflows will be maintained and regulated without causing any issues by focusing on your budget. Financing options will meet shortages, and any surplus will add up to your reserves.
Your budget portrays your financial plan and how you plan on implementing it. From your revenue to your expenses, everything is mapped out. Your financial model helps you in creating a solid budget for your business. With a clear picture of what your expenses and revenue will look like over the years, you can allocate the right funds for every aspect of your business.
By creating a financial model, you will also allow yourself to create an adequate business budget. A core aspect of your business plan is your financial plan to which you add all your strategies. With your strategies in place, you create a budget that ensures that these strategies are followed.
Applying a smart method of budgeting into your business planning will give way to meeting your desired targets. It will allow you to know what your main targets are and how to achieve them. Moreover, you will also know the level of your cash burn. So, you can do proper planning to meet your shortages or remove the element that’s causing an excessive burn rate.
Budgeting requires professional advice and planning. So, if you’ve got a competent CFO service on board, then this becomes easier for you. Here are some tricks to help you go about budgeting your financial model.
One of the main expenses that you will incur will be the payment to your employees. You want to know exactly how many people you need on your team. Moreover, your planning should also include the purpose of their hire and how much you’ll pay them. Ensure that you make a note of all these details. Construct a proper structure in your financial model to list down your salary expenses to have access to easy data.
Your revenue is crucial to your financial model and budget. Your entire business setup is so that you can earn revenue, so you must be extra careful when forecasting it. Do your research for it and estimate how much revenue you’ll earn in your financial model. Doing so will allow you to have a better view of how much earnings you’ll be making in a year.
However, focusing on your revenue shouldn’t be your only goal when budgeting. You should have a look at your cash burn rate as well. Learning about how much you’re spending is crucial to your business. It will allow you to know at what level you will burn through your cash reserves available.
Now that we have talked about your cash burn rate, you should also focus on your funding needs. If you go on to establish your startup with a broad outlook, then prepare your reserves accordingly. You shouldn’t have an excessively high cash burn rate in a business that has a relatively smaller scope- it all needs to be proportionate.
Always remember, when it comes to starting your business, you need to be in proportion. Understand the type of market you’re catering to and then work on creating your financial plan. Don’t overindulge in spending on business ideas that won’t offer you the right payout. Instead, create a financial model to forecast the possible outcomes over time.
When you create the financial model for your startup, you will have to look at a few pointers. These are essential to make sure you’re making the right assumptions for your forecasts. While there is no such thing as the perfect forecast, you do want to make sure that you’re as close to the actual situation as possible.
The number one requirement for you to make is to understand the market you’re catering to. Whether it is a specific niche or a broader market, you will need to do your market research on this. Doing so will allow you to understand your customers and provide for them in the best way possible. It will further help you know how much you’d require to invest in the business to meet your targets.
Next, you will have to know the number of people you will hire. Having the right employees is necessary for any business. You have to consider the reason for every hire and the costs associated with them. It is a huge chunk of your cost, so you want to make sure you’re thorough about it. Moreover, this will also help you understand the type of people you need to create your financial model.
Let’s not forget the main part of your financial model, the assumptions you make. You want to ensure that your unit costs and revenue are accurate. Getting to know your per-unit cost and revenue will help you create a viable financial model. Learn about how much your consumers will want to pay for the goods or services and understand the cost of converting them. One of the major things to consider at this stage is the customer acquisition cost (CAC).
Once you have your basics ready, you will require to input your assumptions into your model. With this, you will create the three basic statements relevant to any financial model. These cover your income statement, statement of financial position/ balance sheet, and cash flow statement.
Your assumptions will allow you to create the financial statements, the first one being the income statement. Here, you forecast all the relevant revenues and expenses for your startup. All of the workings will be done in the assumptions part of your model so that you will transfer the relevant data here.
After you create your income statement, you start working on your balance sheet. The same thing follows in this statement, as well as you take data from your assumption sheet and add values here—the profit results from your income statement transfers here as a part of your retained earnings.
Lastly, you create your cash flow statement to measure the inflows and outflows from your business. All cash elements are considered in this portion, and every non-cash expenditure is added back. Indirect assumptions tie up to the cash flow statement. Since most of the data is procured from the balance sheet, you need to make sure that your balance sheet’s assumptions are relevant.
Adding just any assumptions won’t make your financial model sound. You need to know the realistic approach to add them to your model.
Always consider the size of the market you’re targeting. Your financial model will rely on this heavily as you will need to make assumptions based on the customers you will have. So, the larger your market is, the more you’re going to focus on large-scale assumptions and techniques.
It’s always better to maximize expenses when making estimates to avoid any unforeseen expenditure or losses from an accounting perspective. It holds when it comes to creating your financial model as well. You can’t only focus on increasing your revenue only. Your expenses will also most-likely increase. So, scale them up to offer a much more realistic perspective.
Take what your target audience requires. When it comes to your unit economics, you need to understand what will drive your customers to buy your products. Doing so will help come up with the right prices and margins for your business. Moreover, it will make your financial model authentic.
Don’t add estimates without doing thorough research. Ensure that you’re making your market research and industry comparisons to figure out what benchmarks others in the industry use. Look into similar businesses and how they create their financial statements to get an idea about this.
Once you create your assumptions and financial model for your startup, don’t try to mix things up. If your focus is on a broad segment or market, consumers and investors will likely come to you. Making adjustments to make your model fit particular segments’ needs might not be the ideal thing to do.
Now, the final thing you need to figure out is where to get someone to create your startup’s financial model. Not everyone can do this. So, you will need the right CFO service for this. Luckily for you, we have got the ultimate solution for your financial modeling needs.
We, at Oak Business Consultant, are highly experienced in the consultation and creation of financial models for startups. Visit our website at Oak Business Consultant, and get a free consultation from us!