Microsoft Excel serves many purposes. It’s an excellent tool for organizing data, performing calculations, and creating charts and graphs. But did you know that Excel can also be used for financial modeling?

The program has a plethora of tools and features that make it ideal for financial modeling. In this guide, we’ll look at the functionality of MS Excel for financial modeling and best practices for startups that want to use Excel.

Benefits of MS Excel for Financial Modeling

Different features of MS Excel, like data tables, goal seek, and solvers, can be used to build complex financial models for fundraising and budgeting. While there are plenty of other software programs with similar functionality, MS Excel is the most commonly used program because of the following benefits.

Predefined Formulas

A significant advantage of using MS Excel for financial modeling is that it already has a set of built-in formulas. It can save you a lot of time and effort from having to create your own formulas or look for them online.

Most startups are new to financial modeling. Therefore, they don’t have the time or capacity to invest in learning a new software program. However, since most people are already familiar with MS Excel, it’s much easier to learn how to use it for financial modeling.

Holistic Approach to Modeling

A holistic approach means that you can use MS Excel to model all aspects of your business. Doing this is important for businesses that want to track the impact of different financial decisions on the entire organization.

MS Excel’s functionality lets you model different areas of your company, including:

• Sales
• Marketing
• Product development
• Human resources
• Manufacturing

You can also use MS Excel to model the relationships between different business areas. For example, you can track how changes in the sales team’s budget will impact the marketing department’s budget. Or whether changes in the manufacturing process will lead to higher or lower production costs.

This capability is important for businesses because it allows them to see the “big picture” when making financial decisions.

Data Visualization

Figures and percentages can be confusing for investors or other stakeholders who might not be well-versed in finance. However, Excel’s data visualization features allow you to clearly communicate your findings with charts, graphs, and other visuals. These features are handy when presenting your findings to non-financial people.

Excel also recommends its users the best charts for the data in the worksheet. For example, if you’re analyzing sales data, it will recommend a line graph to show the trend over time.

User-Friendly Interface

Excel has a user-friendly interface that is relatively easy to use. Even if you’re unfamiliar with all the features, you should be able to figure out how to use the basics fairly easily.

There is also a large online community that can help you with any questions or problems. Additionally, there are plenty of online resources, such as tutorials and tips, that can help you make the most out of the program.

Free Templates

If you need basic help getting started, there are several free templates in Excel. For instance, you can find templates for inventory lists, sales invoice tracking, and expense reports.

You can also find more complex templates for creating a pro forma income statement or balance sheet. These templates can save you time and effort, especially if you’re unsure how to set up the financial model yourself.

Common Mistakes Startups Make in DIY Excel Financial Models

The advanced use of MS Excel requires sound judgment and experience. However, many startup entrepreneurs attempt to build their financial models in Excel and often make avoidable mistakes. Here are some of them. 

Human Error

With hundreds of cells to input data and formulas, making mistakes in an Excel model is easy. For example, a misplaced decimal point or a typo in a formula can lead to inaccurate results.

Even when created carefully, spreadsheets have errors in at least 1% of formula cells. Since larger spreadsheets can have tens and hundreds of formulas, you can expect dozens of errors. 

Unnecessary Complexity

Financial models don’t need to be unnecessarily complicated. In the quest to build a comprehensive model, many entrepreneurs make their models too complicated, leading to more errors and making the model difficult to use.

A good rule of thumb is only to include features that you actually need. If a certain calculation or scenario isn’t essential to your business, leave it out.

Hard-to-Audit Models 

It can be difficult to audit a poorly-built or overly complicated Excel model because of the number of cells and formulas involved. A formula that refers to another cell may be several rows or columns away, making it difficult to follow the logic.

That can make it hard for someone else to understand the model or for you to spot errors. The lack of skill in early-stage businesses is often responsible for creating such financial models. 

What’s the Solution? 

As established, startups are often unskilled in using Excel for financial modeling. Consequently, the DIY approach leads to confusing and error-ridden models. 

The solution is to outsource the building of financial models to professionals. On the one hand, it saves the startup valuable time and resources. On the other hand, it lets startups create investor-friendly financial models that communicate their brand store to potential investors. 

Build Bespoke Financial Models for Your Early-Stage Startup

As an early-stage startup founder, when you present your financial model to an investor, you want it to tell the individual story of your business. A bespoke financial model built by an expert does just that. It is designed with your company’s specific goals and objectives in mind.

At Numberly, we have a team of experienced consultants with backgrounds in IBM, JP Morgan, and Oliver Wyman who have worked with startups in various industries. Our experts can help you build a comprehensive and well-defined financial model for your business.

The best part is that we don’t just build the models for the time being. As your business expands and changes in the model become a requirement, we also offer model maintenance services. Schedule a free call with our representatives to learn more.