With over two-thirds of the startups not delivering a positive return to their investors, it’s evident that many lack the ability to generate sustainable revenue. The absence of an efficient financial model could be one of the key reasons for this.

That’s why early-stage startup founders need to focus on creating a robust financial model that will help them raise funds, track their progress, and make informed decisions to scale their businesses. Below, we explain the impact, types, and benefits of financial modeling for startups.

Importance of Financial Modeling for Startups

Financial modeling can help early-stage startups project and forecast revenue, costs, employees, and customers, for the future. In addition, the findings can give them an insight into the viability and profitability of their business structure, scale, and product-market fit.

Doing this is essential because it can help startups assess whether they have a chance at long-term success or if they should pivot their business model.

Financial modeling can also help startups raise money from investors by providing a clear and concise way to present their business plans and growth potential. 

Investors consider many factors when deciding whether to invest in a startup. But one of the most important is understanding the company’s financial health and potential.

Additionally, financial modeling allows businesses to quantify their plans’ assumptions and track progress against those assumptions over time. However, most startups in the early stages don’t need a plethora of features in their custom model.

A suite of unnecessary features can overwhelm the founders and lead to a model that’s too complex to be helpful.

That’s where Numberly comes in with custom financial models. We build custom models according to the maturity level of your business, ensuring no unwanted features are taking up space or distracting from the key inputs you need to focus on.

Highlighting the key drivers of your business, our custom models are perfectly designed to get the investors’ attention and give you the best shot at raising money for your startup.

What Should a Financial Model Contain?

A financial model is a culmination of a company’s historical data, assumptions about the future, and underlying drivers of the business. Therefore, it is crucial to build a robust model that you can use to make sound financial decisions.

There are a few key components that every financial model should contain:

• Purpose: The model should be built for a specific purpose, such as forecasting future revenue, evaluating a new business opportunity, or understanding the drivers of profitability.
• Assumptions and Drivers: Since the model is based on assumptions about the future, it is essential to document these assumptions and drivers. It will help users understand how changes in these underlying assumptions can impact the results of the model.
• Outputs: The outputs of the model should be clear and easy to interpret. The goal is to use the model to make decisions, so the outputs should be actionable.
• Sensitivity Analysis: Is the model sensitive to changes in the underlying assumptions? A sensitivity analysis can be used to understand how changes in the inputs will impact the outputs of the model.
• Cash Flow Statement: The cash flow statement is a key financial metric that shows how much cash is generated (or used) by the business over a period of time.
• Balance Sheet: The balance sheet is a snapshot of a company’s financial position at a given point in time. It shows the company’s assets, liabilities, and equity.
• Income Statement: The income statement shows a company’s financial performance over a certain period.

At Numberly, we create financial models for startups with all standard features. The financial summary dashboard shows the income statement, cash flow statement, and balance sheet.

Our models also come with company valuation and 5-year financial projections. Moreover, we include dynamic assumptions and financial metrics along with value add charts to help your potential investors understand your story better.

How Can a Financial Modeling Service Help Startups?

Startups often face difficulties when it comes to financial modeling. They may not have the in-house expertise or resources to accurately forecast their financials, which can put them at a disadvantage when seeking funding from investors.

A financial modeling service can help startups by providing expert advice and support to create detailed and accurate financial projections. It can give startups the confidence they need to present their financials to investors and secure the funding they need to grow their businesses.

Additionally, much of the financial modeling advice (and templates) online are for established businesses. As a result, they contain features and components that are not relevant or useful for startups.

A financial modeling service can create custom models, providing a tailored solution for each startup’s unique situation. It can make a big difference in the success of a startup’s funding round.

What to Look for In a Financial Modeling Service for Startups?

When choosing a financial modeling service for your startup, it’s essential to consider the following:

Customized Models

Generic financial models are no good for startups since a new company’s financial situation is often very different from an established one. A good financial modeling service will offer customized and bespoke financial models for the unique needs of your business. 

Founder and Investor-Friendliness 

Not everyone is a finance guru. Many stakeholders who’re laypersons will be reviewing the financial projections. Opt for a financial modeling service that makes projections easy to understand for all.

Investors have to evaluate hundreds of thousands of pitches from startups every year. Recent research shows that investors only spend a little over 2 minutes on each pitch. So, it’s important to create a pitch that gives investors a view of your business at a quick glance. 

Dynamic Assumptions

The coronavirus pandemic is the biggest testament to why hard coded assumptions are risky. On the contrary, dynamic assumptions allow startups to see how different changes (like a decrease in revenue) will affect their financials.

Therefore, it’s best to work with a financial modeling service that considers dynamic assumptions to tackle the ‘what if’ situations.

Fortunately, Numberly provides all these features. We specialize in creating detailed and accurate financial projections for startups.

Our templates are customized, user-friendly, and dynamic. Check out this walkthrough of our financial models to learn more.

Final Words

Summing up, a financial modeling service can do wonders for early-stage startups by creating custom models to present to potential investors. Such models can provide crucial insights into a company’s financial health and performance while offering recommendations for improvement.

If you’re looking for custom, tailored, and seamless financial models, Numberly is the service for your startup. Book a call to learn more about how we can help you secure funding and grow your business.