Financial modeling is a complex assignment; not everyone can do it quickly. Founders with little or no finance knowledge are more prone to making inevitable financial modeling mistakes.

Previously we have covered the fundamentals of financial modeling in detail, outlining the definition, types, and best practices. This post aims to help you identify and address some of the most common financial modeling mistakes.

Financial models fail and it’s a known fact!

Financial modeling is the process of estimating and projecting your business’s financial performance in the coming days. It is a complex process that requires extensive analysis of a company’s financial statements and projections. 

However, your financial model is only as good as the data that goes into it. The company’s financial picture will be erroneous if the information is not flawless. If the numbers and assumptions used in the process are incomplete or wrong, the result could be a disaster. Drafting a financial model is connected to the startup’s business plan and should reflect on that.

In the following, we are going to share eight of the most common financial modeling mistakes you can make and the best ways to steer clear of failure.

1 – Ignoring the Fundamentals

Get the picture that financial modeling is a numerical depiction of a business’s activities. It concentrates on the past, present, and predicted future but first of all, it is important to understand that financial models don’t predict the exact futures. 

Financial models are meant to be used as adoption of decision mediums. You can use financial models to estimate the expenses along with the profitability of a proposed project from the beginning.  

Financial analysts use financial models to explain or predict the influence of occurrences, on a company’s stock, ranging from internal elements. Such as changes in strategy or pricing structure to external factors. Including changes in economic policy or legislation. 

2 – Missing External Spreadsheet

Spreadsheets extract data from each other in the financial model. This only works if all the spreadsheets are accessible. And all the spreadsheets are on the same system. Stored as the financial modeling spreadsheet. If this isn’t the case, you will get an error, a broken formula, or an invalid function.

It’s all too simple to make a mess by connecting to a file in a separate folder. Moving or removing data in a document that you have linked from another spreadsheet is another prevalent issue. When one spreadsheet is updated but the other isn’t, it’s a significant problem.

It’s recommended to keep the number of spreadsheet linkages to the smallest. And double-check for accuracy anytime. Confirm if the files, links, or connected data are active and working in good order.

3 – Keeping Things Secret

Unless you are still in the “garage” phase of your business with no one else involved, you shouldn’t be the only person on the team with access to your financial model.

At a base level, you should be sharing the financial model with other members of the leadership or executive team. This allows for a level of transparency, collaboration, and accountability. Not only will others have insights you might’ve overlooked, but it’s also a good way to keep everyone on the same page.

Your revenue goals affect hiring, product roadmap, and more. Not having others in the loop means that goals may not be met.

4 – Poor Scenario Building

Although you would not want to sugarcoat your funding plan. But you do have to consider many situations. A single-lane view taken into consideration can cost you in the long run.

Try to include diverse possibilities in your financial model. This can ensure you’re prepared for anything the startup industry throws at you. So, consider more scenarios rather than relying on one.

5 – Poor Financial Overview

A financial summary is a visual representation of your financial model. It emphasizes all major assumptions and findings. A financial model often contains many pieces. It might take a long time for an investor to grasp the important results. Your business idea can be delayed if underlying rationales take more time. 

A good financial overview saves investors time by making their due diligence process easier. Furthermore, it will assist you in determining what to point up. Because it matters what you highlight when you are presenting your financials.

6 – Being Too Optimistic

While being a “glass half full” kind of person is a great characteristic for a founder to have, being too optimistic can lead to your downfall.

Why?

Because taking one month of high growth and basing your model on that increase can backfire.

Before you pat yourself on the back for a job well done, it’s imperative that you dig into those numbers to understand where that growth came from, and if it speaks to a larger trend in the market.

Having a financial model allows you to easily dig into these numbers and plan for future growth.

7 – Adopting a Very Complex Model

A smart model is beneficial to your organization because it delivers extra knowledge. The more conclusions you make, the less feasible your options become. It’s difficult to forecast what will occur in the future.

It takes longer to make precise estimates about hundreds of various aspects. And the results might not be what you expect. Using 10 to 15 essential assumptions yields more accurate findings in many circumstances.

Finding a balance between the model’s flexibility and complexity should be your aim. If you’re an entrepreneur, you should take the time to examine the amount of complexity that your financial model may entail.

8 – Mathematical Errors

This blunder is self-evident. To build an excellent financial prediction for your company plan. You don’t have to be an expert in financial modeling services. Even so, you’ll need to know the fundamentals only. Financial modeling, corporate finance, and accounting are all included.

If you’re not sure how to make forecasts with financial modeling without errors that will impress your investors. Here, you can either hire a professional to seek help or rely on built-in templates.

The best practices for Financial Modeling

There is definitely not a one-size-fits-all formula here. However, applying and following certain best practices can be extremely helpful. Here, we would advise on the following:

1. Include a variety of situations dependent on external circumstances

2. Ensure that your primary drivers are clear

3. Maintain consistency with unit economics

4. Note down every detail and Include comments to make the text simpler to understand

The Best Way to Avoid Financial Modeling Mistakes

Founders don’t make these common financial modeling mistakes. A well-executed financial model is an essential tool for your business. It can assist you in making well-informed business decisions. Assess your fundraising prospects, and track your progress over time. 

If you intend to pursue your entrepreneurial concept further. When building your own financial model, it’s imperative to be assured that you don’t make any costly mistakes.

Numberly is the best solution to all of your financial modeling problems. To learn more about how you can avoid these mistakes and build a successful financial model.  If you are looking to build a financial model for your business,  schedule your free consultancy call and get your customized financial plan to stand out. We’ll assist you in how you’ll avoid making bad decisions that could cost you valuable capital and even worse, damage your reputation.