If you’re thinking of starting a business, then you should know the importance of a startup financial model. It can help ensure that you plan out your decisions smartly, and create a viable business for yourself. But thinking of creating a startup financial model is easier than actually getting down to building one.
The process of creating a financial model is extensive and requires a lot of effort to perfect. You can make use of a financial model example to help you with this as well. Here, you will find the best practices that you need to help you create the ultimate financial model in excel.
Before we get into the practices of creating a financial model template, let’s help you understand the importance of it. Below are two of the most important reasons why you need to build a startup financial model for your business.
The number one reason why you should be looking into creating a financial in excel is for your business sustainability. Your financial model, if made using the right techniques, will help you factor in different scenarios. This will help assess how your startup performs over time.
Your financial model in excel will help you understand what your future position will be after making various decisions. As a startup, you want to ensure that you’re doing the best you can to be sustainable. What’s a better way to ensure sustainability than forecasting and predicting where your business value will go in the future?
Startups require investments to make sure that they can run. Without investors, it becomes difficult to get the finances you need for your business. Your startup financial model will give potential investors an idea as to whether investing in your business is worth it or not.
So, you want to ensure that your financial model in excel represents everything that investors would want to know. Make use of a financial model template that will help you understand how to incorporate an investor’s perspective as well.
Let’s get into an important thing- how to create your startup financial model using the right approach. Creating a financial model for startups is tricky, and you want to ensure that you’re choosing the best option.
The bottom-up approach focuses on an inward-out approach where you make the maximum use of assumptions. Here, you will start predicting your revenue, expenses, and every other financial aspect of your startup.
The method works great for startups since you do not have adequate data on hand initially. Since there is no historical data, working with accurate predictions becomes highly necessary. This approach is also appreciated by many investors, so you will surely benefit from creating a startup financial model using this.
With the top-down approach, the main focus is on the outward-in aspect. So, over here, you will be assessing macro-level general details before moving on to your specific business. So, rather than focusing on your revenue and expenses first, you will focus on the market data available about the industry.
Now, we will talk about those things that you should do as you go about creating your startup financial model. Here, you will find some of the best practices that will help you come up with an efficient financial model in excel.
The first thing that you need to focus on is making your startup financial model is simple. Why is this necessary? Well, since you’re in the early stages of your business, you don’t want to overload your financial model in excel. Otherwise, things will get too complicated.
Once your startup grows, you will eventually have more things to add to your financial model template. So, do this at the right time rather than filling it up when it is not needed.
Your assumptions are everything when it comes to forecasting. You do not want to add items to your model that aren’t relevant to your business. Instead, you should make it a habit to keep reviewing what assumptions you’re adding.
Through this, you will understand how each assumption works in your startup financial model. Every time you make any adjustments in your model, make sure to always incorporate adjustments all over. What this means is that if you assume an increase in revenue in the following years, then it is best to adjust the costs as well.
A key metric to use for your startup financial model is sensitivity analysis. This will help you keep track of how changes in values will affect your results. For instance, any changes in your assumptions will lead to a change in your financial statements.
Therefore, you will be able to understand the extent to which every decision of yours affects the business. It is highly relevant to run a sensitivity analysis for your startup business. You will find yourself much more equipped to deal with how things can work under different scenarios.
One of the most important factors that you will have to consider is your expense list. As a startup, you’re less likely to have a large list of expenses for you to spend on. Unfortunately, this doesn’t remain the same. Your expenses will surely shoot up once you begin with your operations.
To optimize your startup financial model, your chief financial officer should get the basic expenses down for you. It is important to figure out your expenses as you start creating your financial model in excel, otherwise, you’ll be up for a surprise!
You should know that creating a startup financial model is not a one-day job. You will have to get into the details of it, and your CFO must help you with this every step of the way. Make use of the right approach and practices to ensure that your financial model template is created up to the mark.
If you’re unsure as to how to go about doing all this, then rest assured. We, at Oak Business Consultant, can help you with your startup financial model needs. Take a look at how our CFO service can help you with this highly technical and critical success factor.
Our services come with vast experience, so head on to our website, at Oak Business Consultant, for a free consultation!