All startup founders must create financial projections for their companies at some point, especially as they embark on the fundraising journey. That is true regardless of them having the finance knowledge to do it correctly or their company having the financial history to make their job easier.
However, very few founders understand what those financials, especially for a pre-revenue company, actually represent. In this article and the corresponding video, we explore how to use financial models as evaluation tools to help you build better businesses from the start.
How does a financial model relate to your business plan and your vision?
A financial model is a quantitative representation of the company’s business plan. You simply present your business plan, business model, and go-to-market strategy in quantitative terms. A financial model helps you evaluate the financial feasibility of your business and model your company’s growth based on your vision for the next five years.
How does a financial model change and does it have predictive power?
A financial model does not have predictive power. A financial model is your financial plan for how you will achieve your goals. As you get more information from the market, your financial model will change.
Even established publicly traded companies only give guidance for three months, precisely because it is so hard to predict future financial performance accurately. For a startup, the uncertainty is much larger and, therefore, the changes to the financial model will be even more drastic.
Can a financial model help you refine your strategy?
A financial model demonstrates to investors, your executive team, and other stakeholders that you have a measurable execution plan. It shows that you thought your strategy through and serves as a blueprint which measures the effectiveness of that strategy.
For example, a financial model can signal when you miss your sales targets so that you can take a step back and re-evaluate what you are doing. This makes you a lot more prepared to face uncertainty and react to market feedback faster than others.
Can a financial model help you build a sustainable business long term?
In addition to serving as a tool to evaluate the financial feasibility of your company, a financial model can help you create a sustainable business long-term.
You can identify and calculate key financial metrics to ensure that they are in line with the industry standards or better. If your projected or actual key performance indicators are worse than those of your competitors, it means that you are building a company that is not sustainable long-term and that it is time for you to adjust your plan.
A financial model does not have predictive power, but it serves as a financial planning and analytical tool. I urge that you use your startup’s financial model to build a viable business from the start.
For more information on how to translate your business plan into a financial model, go to www.thestartupstation.com/courses.
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