Financial models come in different shapes and sizes. The type of financial model you build for your startup will depend on your business stage, the funding you’ve raised, and your long-term goals.

The financial models for early-stage startups are typically simple, concise, and easy to understand. They are used to pitch investors and assess the feasibility of your business.

However, not every startup can use the same type of financial model. Therefore, it’s important to be familiar with different models.

Types of Financial Models for Startups 

Although there are many financial models, we will focus on the most common ones below.

1. Three-Statement Model

The three-statement model is the most basic type of financial model. It consists of three statements:

• Income Statement, showing your revenue and expenses
• Balance Sheet, showing your assets and liabilities
• Cash Flow Statement, showing your cash inflows and outflows

Objective: The objective of this type of financial model is to show your financial position at a certain point in time. For instance, you can use it to show investors how your business has performed over the last year or two.

Projections: The three-statement model projects the future performance of the company. It makes assumptions about gross margin, operating margin, revenue growth rate, and EBITDA margin.

2. Comparable Company Analysis

The comparable company analysis financial model compares the financial ratios of similar companies to determine the valuation of a company. It’s also called Trading Comps.

The gist of it is that you find 3-5 companies in the same industry with similar characteristics (same size, same business model, etc.) and then use their ratios as a guide to value your company.

For example, if you’re trying to value Company XYZ, that’s in the same industry and has similar characteristics to public companies ABC, DEF, and GHI, you would look at those companies’ financial ratios and use them as a guide to value Company XYZ.

The most common ratios used in a comparable company analysis are EV/EBITDA, EV/Sales, and PE ratio.

Objective: The objective of this financial model is to value a company relative to its peer group of competitors.

Projections: The common projections in a comparable company analysis are sales, EBITDA, and earnings per share. The model also uses financial valuation methods, like discounted cash flow, to value the company.

Must-Have Sections in a Startup Financial Model

The financial model for a startup must include several key sections. Here are the most notable ones.

Three Financial Statements

The three financial statements are:

1. Cash Flow Statement
2. Income Statement
3. Balance Sheet

Each statement offers valuable insights into the startup’s overall financial health. Potential investors can use the statements to evaluate the startup’s ability to generate revenue, manage expenses, and achieve profitability.

Company Valuation

Company valuation refers to the process of determining the worth of a company. There are three main ways to value a startup.

1. Discounted Cash Flow Analysis

The discounted cash flow (DCF) valuation method is a fundamental way to value any company. The DCF valuation methodology values a company by projecting its future cash flows and then discounting those cash flows back to the present.

The reasoning is that a dollar today is worth more than a dollar in the future, so we need to “discount” or adjust for that time value of money.

The most common discount rate in DCF valuations is the weighted average cost of capital (WACC).

The WACC is the rate a company expects to pay its creditors and shareholders to finance its assets. It is used as a discount rate because it represents the minimum return that a company’s investors expect.

The DCF-derived value is a function of the company’s future cash flows. As such, the inputs into a DCF model are the company’s sales, margins, expenses, and tax rates.

2. Revenue Multiple

The revenue multiple valuation method is a relative valuation approach that values a company based on its revenue. The revenue multiple is calculated by dividing the company’s market value by its revenue.

For example, if a company has a market value of $100 million and annual revenue of $20 million, its revenue multiple would be 5x.

3. EBIT Multiple

EBIT(earnings before interest and taxes) measures a company’s profitability. The approach helps to measure the ‘earning yield of a company, which can give an idea of how much profit a company generates relative to its market value.

EBIT multiples can be used to compare companies within the same industry. A higher EBIT multiple indicates that a company is generating more profit relative to its market value and is therefore considered to be more profitable.

There’s no standard valuation method for early-stage startups since every business has unique components. At Numberly, we use one of these three methods for startup valuation. The method we use depends on the size, scale, and type of startup. 

Which Financial Model Should Startups Use?

As you can see from the above mentioned types, most financial models cater to established businesses. For instance, the leveraged buyout model is used by private equity firms to assess whether a target company is worth acquiring.

Meanwhile, the precedent transactions analysis and comparable company analysis models include competitors and their transactions. An early-stage startup doesn’t have these things. So, which model should startups use?

The three-statement model could be the starting point for your startup. It encompasses a company’s financial standing at a certain point in time.

But then again, a simple or generic three-statement model may not suffice. It may lack some key components that are important to early-stage startups.

For one, a three-statement model may not have enough room to factor in a startup’s growth potential. That’s where custom financial models come in.

Get Custom-Made Financial Models for Early-Stage Startups

A tailored or custom-made financial model is a great tool for an early-stage startup as it’s according to the company’s specific needs and goals. Numberly helps you tell a story to your investors and gauge your company’s financial future by creating bespoke financial models for your needs.

Our models fit your company’s maturity level, eliminating the overwhelming features of pre-build generic models. Instead, our models only focus on the most impactful drivers for your business and showcase dynamic assumptions to factor in an early-stage startup’s ever-changing nature.

Check out this walk-through of our financial model to glimpse how you can impress a potential investor with a tailor-made model. Schedule a call to learn more.