Creating a financial model as a startup can be a daunting task. There are many moving parts, and it’s easy to get lost in the weeds. On top of that, there’s conflicting advice about the best way to go about it.

However, there are a few basics that every early-stage startup founder should know about financial modeling. Below, we look at the six things founders must consider when creating financial models for fundraising, budgeting, forecasting, or any other use case.

Why Should Startups Care About Financial Models

Before we jump into the must-knows of financial modeling, it’s essential to understand why startups should care about financial modeling in the first place. 

Put simply, financial models allow startups to make better decisions by simulating different scenarios and understanding the potential outcomes. Making well-calculated decisions is imperative for early-stage startups, which often operate with limited resources and need to be strategic in their decision-making.

For example, a startup might use a financial model to forecast its burn rate (the rate at which they’re spending money) and understand how long its current runway will last. They can also use this information to determine how to allocate resources and when to start fundraising.

6 Things Startups Should Know About Creating Financial Models

The purpose and nature of a startup financial model will differ across organizations and use cases. For example, a financial model focused on fundraising may emphasize certain metrics and inputs over others, while a model used internally to inform business decisions may prioritize different data points.

No matter the specifics, there are a few things standard across most financial models. Therefore, early-stage founders should be familiar with them.

1. Avoid Hard-Coded Assumptions

One of the most important aspects of a good financial model is that it is dynamic. In other words, founders should be able to change inputs and assumptions and see how those changes impact the outputs.

This is why hard-coding values, also known as fixings, into a model is generally discouraged. For example, many models will include a line item for “salaries and wages” with a fixed value for how much each employee costs. It’s an example of a hard-coded assumption.

If the startup plans to hire new employees or give raises in the future, this value will need to be manually updated each time. On the other hand, a dynamic model would automatically update salaries and wages based on the number of employees and their individual hourly rates. Thus, it saves time and ensures accuracy.

2. Keep It Ambitious Yet Achievable

A financial model is only as good as its inputs and assumptions. So while it’s important to be ambitious when forecasting a startup’s future, founders should also be realistic. Making assumptions that are too optimistic or pessimistic will render a model useless.

One way to avoid this is by basing assumptions and inputs on historical data when available. For example, a SaaS startup could look at its churn rate over the past year to inform its future assumptions.

Another way to ensure accuracy is by running different scenarios. For example, a startup could model what its financials would look like if it achieved 10% or 20% month-over-month growth.

It allows startups to see how different inputs and assumptions impact their business. It also forces founders to be honest with themselves about what is achievable and what is not.

3. Include Multiple Rounds of Funding

A big mistake early-stage startups make is failing to include future rounds of funding in their financial models. Many times, founders will build a model that only includes the current round of funding they are seeking.

This is a mistake for two reasons. First, it assumes that the startup will only need one round of funding, which is rarely the case. Second, it doesn’t give investors a clear picture of the startup’s long-term financial health.

4. Keep It Purpose-Focused

Why are you creating this financial model? What purpose will it serve?

Answering these questions early on will help keep a financial model focused and on track. There are several different use cases for financial models.

Some startups use them to raise capital, while others use them to make business decisions. No matter the case, each model should have a clear purpose.

The components you include in a model and the assumptions you make should all contribute to that purpose. Otherwise, there is a risk of creating a bloated model with unnecessary information.

5. Don’t Over-Rely on MS Excel

MS Excel can be a powerful tool for startups to build financial models. However, it also has its limitations.

One of the biggest problems with using Excel is that it’s easy to make mistakes. A simple typo can throw off an entire model. Collaboration is also a pain, especially if you need to send individual spreadsheets to different people.

6. Get a Custom-Built Financial Model

Generic financial models are readily available online and in business books. However, these models are not tailored to the specific needs of a startup.

On the other hand, a custom-built financial model will consider a startup’s unique business model and situation. It will also be easy to use and understand since it won’t have the extra features and assumptions more suited for an established business.

Let Numberly Handle Financial Modeling For You

Did you know 38% of the startups failed in 2021 because they failed to raise new capital or ran out of cash? Such an alarming figure should be sufficient to cement the importance of a well-built financial model for startups.

A financial model tailored to a startup’s unique situation will not only allow accurate budgeting and forecasting but will also show investors that the startup is well-prepared, which will give them the confidence to invest.

Numberly can help you build a comprehensive and custom financial model for your startup, taking into account all the important factors and assumptions that describe your business. By creating bespoke financial models, we help startups identify blindspots early on to avoid any nasty surprises down the road.

Moreso, our bespoke financial model will tell your brand’s story in a way that’s easy and comfortable for the investors to understand. Book a 30-minute call today to learn more.