Why Every Startup Should Have a Financial Model

Why Every Startup Should Have a Financial Model

Starting a startup is one of the most exciting prospects you can take part in. There’s nothing like taking an idea and turning it into a thriving business.

However, several startups fold due to a lack of planning. When you’re starting a business, you need to hash out a financial model that works for you. This model refers to an equation, tool, or other mathematical models that project how your company will perform.

Keep reading to learn more about why having a financial model can be useful to your startup.

It Builds a Solid Financial Foundation For Your Business

When you build your company on data and facts, it creates a solid foundation. There are always qualitative measures that you need to stay aware of in the business, but too many business owners lead with emotion.

Quantifying and validating are core concepts of testing a business. By putting every part of your business under a microscope, you’ll make it sustainable and can put more faith in the moves that you’re making.

Having a Financial Model is Useful During Investor Pitches

There comes a time that you’ll want to begin taking on investors. If you’re going to allow investors, they need to understand the health of your business.

It’s much easier to show them how your company is performing and how it will most likely perform in the future when you have a financial model. You’ll also be able to approach banks with the right information. The financial model can assist you in the process of financing for any growth you decide to do.

You’ll Be Able to Forecast Things Like Sales Projections and Revenue.

Nobody wants to be in the dark when it comes to their business. By instituting a financial model, it’ll give you critical insight into your future sales projections and revenue.

Rather than just looking at dollars and cents, the model will also account for matters like your geography, rises and falls in demand, employee growth, and fluctuations in inventory.

Understanding how these changes come into play can help you hone your marketing plans and make decisions over the course of the next several years.

It Lets You Manage Risk Better

A financial model isn’t exactly a crystal ball, but you’ll breathe a sigh of relief knowing that you took an objective approach to your future. It’ll let you point out risks before they happen in real-time so that you won’t be caught off guard.

Risk management will help you make it through the ebbs and flows of the economy as it changes. Leave no stone unturned when looking into these sorts of projections. Even if these risks don’t end up turning into anything, you’ll already have a plan just in case.

Checking in Monthly Helps Your Company Plan Better

Using one of these models is also helpful because it gives you a reason to get on the same page once a month. Using the financial model as a guideline for staying on track gives you hard numbers to look at to see if you’re in the right place.

If your company is deviating from the plan, the financial model serves as a measuring stick for any adjustments that you make. Monthly assessments teach you and your management team to stay on task and in the loop about all aspects of the business.

You Can Keep Your Shareholders in the Loop

If you have shareholders, you owe them absolute transparency with your company. Using financial models keeps them in the loop and encourages growth and participation.

The financial model explains how the company is on pace to progress through the future. The shareholders can then feel good about their investment and where the business is going. These models integrate nicely with software platforms that can create graphs, diagrams, and other visual presentations that make it easier to explain every detail.

You can also use sophisticated simulations that paint a picture of the data.

There Are Different Models You Can Choose Between

The type of financial model that you put into place can vary as well. Some examples of financial models that companies use include top-down forecasting and bottom-up forecasting.

A Virtual CFO or Financial Modeling expert can provide you with financial models that are specific to your industry and needs.

Having a Financial Model Allows For Scenario Planning.

Scenario planning is all about uncertainty and the possibilities that can arise and the need to have agility in decision making. When thinking of scenario analysis, think about it as “what if” scenarios. A common approach is to use three scenarios – often a lower case, mid-case, and uppercase.
You can test these variables impeccably by putting scenario planning to use.

Scenario planning fosters strategic thinking and can point out trends you need to jump on and uncertainties that your business might deal with. This tool lets you test out several possible futures so that you can hone your decisions for today.

Limit your scenario plan to just a couple of different future scenarios so that you don’t get too overwhelmed or bogged down with information.

Give Your Startup the Tools it Needs

When you have the right financial model, the sky is the limit for your company. The tips in this article explain precisely why this is not just a perk, but a need for any business.

Put a model into place with your business so that you can start enjoying these benefits.

We can help you grow your startup by leaps and bounds using some principles and strategies that are proven to work. For more startup advice and hands-on service, contact us at 03 9008 5422.

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