Creating a financial model isn’t enough. The model should be easy to use/understand and based on reliable data. However, early-stage founders typically make some mistakes when creating or looking for financial models.

As a result, their models aren’t always accurate and can cause problems down the line. An error in your financial model can also put you at risk of not getting investments from VCs.

Below, we discuss some of the early-stage founders’ most common mistakes when looking for a financial model.

6 Mistakes Early-Stage Founders Make In Their Financial Models

Since a financial model is such an essential tool for startups, you would think that founders take the time to create accurate models. Unfortunately, that’s not always the case. Here are some common mistakes to avoid.

Not Planning for Different Scenarios

A one-track financial model is not enough. You should have a model that shows how your business will perform under various scenarios. For example, what if you can’t get the full amount of funding you’re requesting? What if certain expenses are higher than expected?

Ideally, you’ll have a base scenario. It assumes your growth is consistent and steady. If something throws off your base case, you should have contingency plans in place.

The alternative plans will help you make decisions and keep your business afloat. Here are two other scenarios you must have:

• Upside Scenario: What if everything goes better than planned? The scenario should show how you’ll take advantage of the opportunity.
• Downside Scenario: What if something goes wrong? The scenario will cover the steps you’ll take to mitigate the risks.

A sensitivity analysis can help you test how different assumptions affect your business. It’s a type of what-if analysis that uses different input values in your model. As a result, you can see which inputs impact your business the most.

Not Incorporating Data-Driven Assumptions

In 2020, there was a 12% increase in data-driven decision-making in organizations. The trend is expected to continue in 2021 as more startups realize the importance of data.

Data should play a role in your financial model. After all, the whole point of a financial model is to give you a clear picture of your business’s finances. In addition, the data will help you make assumptions that are realistic and achievable.

For example, you can use data to help you forecast your sales. You can also use it to make assumptions about your customer acquisition costs.

A lot of early-stage founders rely on their gut feeling when making decisions. They think they know their business and their customers better than anyone else.

While there’s some truth, you can’t let your gut feelings dictate all your decisions. Instead, you need to use data to guide your decision-making.

For example, let’s say you’re trying to decide whether to enter a new market. You might have a gut feeling that the market is ripe for your product. But if you don’t have any data to back up that feeling, you could make a big mistake.

Not Matching the Model With the Pitch Deck

If you’re creating a financial model to attract investors, it’s imperative to make sure it matches your pitch deck. The two should complement each other.

Your pitch deck is a way to tell your startup’s story. It should be convincing and engaging. On the other hand, your financial model will show your business’s potential.

The goal is to get potential investors excited about your business. But if your financial model doesn’t match your pitch deck, you’ll only confuse them.

For example, let’s say your pitch deck talks about how you will disrupt the market. But when investors look at your financial model, they don’t see any evidence of that. As a result, they might lose interest in your business.

Not Incorporating All the Costs

Often, early-stage founders only think about the costs associated with launching their product. They don’t take the time to consider other costs they’ll incur along the way.

For example, they might forget to factor in customer acquisition or retention costs. As a result, their financial model isn’t accurate, and they could run into cash flow problems.

Additionally, the variation in the timing of money coming in and going out of your business also impacts cash flow. For instance, a B2B e-commerce startup has to pay the manufacturing costs upfront. 

However, the money from the customers comes much later due to the 30-day invoice payment term. Therefore, it’s imperative to understand your business’s cash flow situation and ensure you have enough runway to sustain it.

Not Knowing How to Use the Model

Creating a financial model is one thing. Using it is another. Just because you have a model doesn’t mean it’ll be helpful.

The model is only as good as the assumptions you make. If your assumptions are off, your model won’t be accurate.

What’s more, you need to know how to use the model to make decisions. For example, you might use the model to choose between different pricing strategies. 

Or you might use it to see how a change in your business model would affect your bottom line. Make sure you understand your model’s features and functions before you start using it.

Using a Generic Pre-Built Template

Yes, a pre-built template might save you some time. But it’s not always the best option.

When you use a pre-built template, you make many assumptions. For example, you’re assuming that the template is accurate and up-to-date. You’re also assuming that it reflects your business accurately and comprehensively. 

It’s better to build your model from scratch. That way, you can tailor it to your specific business needs. Plus, you’ll have a better understanding of how it works.

Most templates are built for established businesses. Or, they may be generalized to apply to multiple variations of the same business. 

As a result, these templates often have features that early-stage startups don’t need.  Early-stage startups don’t need all the fancy features and overwhelming detail.

A simple model that reflects your business at your current maturity level is all you need to get started. You can always add more complexity later on as your business grows. For instance, adding dynamic assumptions or different scenarios can make your model more robust.

Your model grows in complexity and feature-richness with your business. For instance, if you add too many revenue streams in the initial stages without certainty of success, it will make your model harder to maintain. Moreover, you’d have a hard time defending it in front of investors. 

On the contrary, if you add more features to your model as your revenue streams grow, your model will remain seamless, easy to use, and investor-friendly. 

Final Words

While most of these mistakes have to be avoided by the founders themselves, a third party can help avoid the last mistakes. At Numberly, we create custom financial models for startups. Since our models follow a modular structure, they adapt flexibly to business 7growth with time. 

Our templates are tailored to your requirements, helping you impress potential investors and use your model to the fullest. Since the model is created specifically for your needs, there are no overwhelming or unnecessary features to distract you from your goal. Book a call with us or watch this walkthrough video of our financial model to learn more.