Your financial model should have all the ingredients you need to forecast your business. Some of these will include how the financial model builds, and some will be your assumptions about business growth, investments, customers, costs, and so on.

Your financial model and future-looking assumptions must work in tandem for your model to be a useful asset. Agreed, you will face obstacles, but there are small mistakes that you’re committing in your financial model.

We’ve all experienced the “Change the model, it doesn’t work” scenario, and that may be right sometimes, but not every time. Without further ado, let’s go through the 6 common mistakes startup founders make, and what you can learn from them

1. Leave out irrelevant details

Let’s be honest! A startup is all about excelling at record speeds. As a founder, you may be scrambling to cut your expenses. It all makes sense, but jotting down every small expense will make things complicated for you. 

You have more important things to worry about than listing small expenses. Your time’s valuable, so let’s not waste it on things that make no difference.

And even if you add every detail, it does not mean the model is a better tool for you, your investors, or your team. 

Some founders want their model to be a precise prediction about the future. Spoiler alert – it never will be; there are too many variables you cannot control, let alone the ones you can. 

Think of it as a guide to your assumptions, the choices you’re toying with, and the scenarios you think will play out. They will all lead to considerations you’ll need to consider to optimize your strategy, growth, hiring decisions, fundraisings, product roadmap, and many other tasks.

There will be a wide range of variables you’ll want to include in your model to reflect your business – a pro modeler should always make sure that is the case before handing it over to you.

 But here’s the thing – of all those variables, there’ll only be a small number that moves the needle. So finding those and focusing on them is crucial and avoiding tweaking things that make no difference to your business but may be cosmetic niceties is important!

2. Your model needs love – please don’t ignore it!

What’s missed, is missed. Don’t fret over missed targets. If your model was still forecasting last quarter’s projections, then I’m afraid it’s not going to work.

Taking time to look at your reported actuals is a good practice. It’s also a good leadership sign for your team in setting out your progress, performance, and often what you’ve learned. 

Put your month-end actuals into your model. That way, you have a continuous track of performance vs. plan and can see how accurate your forecasting is while it’s fresh in your memory.

3. Don’t focus on one option for too long

We all have biases, with differences of opinions. But, unfortunately, from a modeling perspective, this can be quite dangerous.

You can scenario play for the following outcomes:

1. Marketing approach
2. Hiring plan to accelerate the product roadmap
3. Breakthrough into new channels number of repeat customers cost per lead
4. Manufacturing lead times

If you then have to pivot, make changes, survive to pay the bills, or cope with extraordinary growth. You may not have all the answers, but you’ll have discussed your options.

This is a great example of where a financial model is a tool the leadership team can use to help in developing their thinking and understanding of business

4. The good news is always easy!

 We can all make the numbers look amazing! But that’s not the point we’re making here. Nonetheless, many founders will configure their model so that the results appear to be attractive!

Every founder needs to be a glass-half-full kind of person, but falling into this trap can create many problems. While it’ll be easy to tell the good news to your team, your investors may be a little more cautious.

Whether it’s macro trends, industry averages, the prevailing economic climate, or your experience, an optimistic model will not be well met. 

As the saying goes, “You can do anything, but you can’t do everything, so choose carefully”. 

It may well be that you’ve been realistic and even conservative in your assumptions, but your optimism about how much you can do is a big risk. Focusing on delivering one thing may be better than attempting to deliver multiple things, especially to an investor!

5. Your model needs to be financially viable

A few of us will have stealth ideas that we want to keep secret, but it’s likely to be only a small percentage.

We should use a financial model and sweat the asset, sharing it with teams and investors as a tool to help better understand and develop the business. Keeping it to yourself smacks of knowledge being power creates a divide, and leaves your team in the dark – not a good look.

Not only can it be a great communication tool, but also acts as a means of holding the team to account for and explaining decisions, priorities, and areas of focus. 

In addition, it’s a rallying point for performance measures and instills transparency about the business so you’re all on the same page.

6. Your business is unique – your financial analysis model should be too!

An off-the-peg suit from a department store almost fits many people but doesn’t fit anyone. That goes for financial models too – a template is helpful, but would you stake your business on it? Would you use it to present to an investor? Would you make decisions based on critical data points it gives you?

Templates have their place, but they’re never going to be a substitute for your business. Your model needs to be relevant, contextual, easy to use, valuable to share – and in doing all that, meet your objectives.

Your model is an investment in your business; that has support from professionals who are by your side to aid your plan. A free download template cannot do that.