A financial model can be a great tool to use when working with business ideas, looking to finance your company, or trying to raise capital in any other way. However, knowing where to start and how to make one that’s easy to use and understand can be tricky.

Thankfully, Numberly makes it easy! With us, you can have an accurate and customized financial model, taking advantage of direct access to market experts. 

Financial modeling can be one of the business’s most challenging and time-consuming aspects. If you’re not prepared, it can also lead to inaccurate projections, which can be detrimental to your business – or worse, show you to launch with serious cash flow issues. 

There are many mistakes that startup founders make while doing business modeling; it’s easy to make these mistakes and not even realize them. In this article, we’ll focus on three common financial modeling mistakes that founders make and how we can help you avoid them when creating models. 

1) Being clueless about how much you need to raise!

Unless you’ve done your homework and done some modeling, the chances are that you’re making some mistakes. For instance, how much money do you need to get your business off its feet? Look at how much capital is typically required to launch a business, but err on raising too much than too little. 

Fundraising takes time and effort, so overshooting what’s necessary will save time and resources. Once you know approximately how much funding you’ll need, evaluate whether or not it’s feasible to raise that amount in what amount of time. 

There are three ways to go about this: 

• You can use your funds as collateral for loans. 
• You can seek out private investors with an established track record of investing in companies like yours. 
• Grants tend to be more challenging to acquire and often have stricter requirements, so they should only be pursued if all other options have been exhausted.

2) Not considering multiple scenarios

Many people make financial modeling mistakes by creating a plan that only allows for one outcome. They fail to account for unforeseen competition, personnel changes, or unexpected expenses. Always think about multiple scenarios – you’ll be able to see if there are potential pitfalls in your plan and make adjustments accordingly. You can also use different scenarios as benchmarks to see how close your projections were to what happened at specific points in time. 

And don’t forget to include realistic assumptions in your model – as opposed to wishful thinking or worst-case scenario thinking – so you know where things could stand out of a situation doesn’t go as planned. Don’t get too granular; If you’re an accountant or business consultant used to working with high-level numbers, it might feel tempting to spend hours tweaking the finer details of your calculations. 

But remember that the goal is to create a blueprint for what your company’s future looks like, not do complex analysis. Save those details for a more rigorous analysis after the fact! Include flexibility in cash flow projections. People with an excellent understanding of their industry usually take shortcuts when making their cash flow projections because they know which aspects will significantly impact revenues and which won’t. But if you’re less familiar with the industry (or even just trying to brush up on some basics), it’s essential to consider all possible sources of revenue and costs.

3) Concluding based on assumptions

If you’re doing financial modeling, it’s natural to take a position and develop specific assumptions. However, depending on your situation, too many variables could be involved. It is risky to assume that your product will sell ten units when they’ve only been tested with five (as above). 

Assuming that a market exists that you haven’t yet talked to anyone about, the market is even riskier. Doing adequate research or reaching out to experts – companies like Numberly before jumping into these types of assumptions will save you headaches later on—we can help you discover if there’s or there’s not any way for your company to succeed in that kind of environment. 

The easiest fix? Adjust your expected sales accordingly before continuing down the financial modeling road and check off mistakes #1 and #2 at once. Don’t depend on revenues from new markets. One mistake prevalent among startups with few resources is not thoroughly investigating the risks associated with entering new markets. They may get swept away by the hype around an opportunity, unaware of the potential downsides. It’s tempting to take advantage of lucrative deals while seeking opportunities in untapped markets. 

However, such pursuits are usually accompanied by significant risks and significant time investments. Research has shown that companies who try diversifying their customer base have lower profit margins than those who don’t diversify their customer base. 

Consequently, if your goal isn’t focused on expanding into new markets but on optimizing revenue streams already available to you, then this tip should help save time and money wasted on pursuits that ultimately lead nowhere. In other words, instead of risking $5 million to break into a new market, use that same amount of capital to build your current market presence. Similarly, saving yourself time and trouble by sticking with what you know will make more sense for your company’s long-term success. 

Financial Model Can Help Guide Strategic Decisions

1. Profits and Cash Flow

The two most important financial metrics are profit, net income, and cash flow. Profit is your business’s revenue minus its expenses; for cash flow, you add non-cash charges like depreciation (but not taxes) to net income. 

As long as you can cover your operating costs with enough revenue, or if your savings or investments make up any shortfalls, you have positive cash flow and are in good shape. If those fall short of what’s needed to keep operating at current levels, however, your company will start heading into a hostile territory quickly, and that’s when bad things happen. For example, creditors might pull the plug on lending you money to keep the business afloat, or employees might leave because they see the writing on the wall.

One of the best ways to avoid making mistakes when creating a model is to work with experienced professionals. It is where Numberly comes in. Another good idea is to test the model before using it to make decisions thoroughly. Taking these precautions can help ensure that your financial or business model is as accurate and reliable as possible. Finally, the financial model can become outdated over time. It is why it is essential to review and update the model regularly. Otherwise, it may no longer be accurate or helpful.

2. Setting Key Performance Indicators

You can have all your fancy metrics in place, but if you don’t have KPIs (Key Performance Indicators), you won’t know what measures genuinely matter. The top 5-10 KPIs are usually all you need to track. Make sure they align with your core business objectives. Once they are set, make it easy for everyone in your organization to understand how they impact your success.

Your employees should use these KPIs as actionable guides when making decisions or setting goals. If a metric is not aligned with company objectives, it doesn’t matter if it’s high or low – ignore it! Focus on what matters most and let metrics drive the action instead of another way around. When designing performance indicators, focus on what matters most.

For example, do you want to decrease the number of customer complaints by 20% this year? A simple solution would be to hire more customer service representatives or change the contract wording. 

3. Building a Business Model 

A financial model can help you understand how your business will operate, what resources you’ll need, how much money you’ll make, and more. If your company is already up-and-running, building a financial model can help you predict whether or not your business will succeed based on current trends in your industry. 

Even if you don’t have all your numbers yet (like revenue forecasts), you can use Numberly’s pre-populated data tables to plug in rough estimates of other inputs like fixed costs or customer acquisition costs. We will also help you learn more about the financial risks involved. Once you have something that works for now, it’s best to treat it as an evolving work in progress—keep adding new assumptions each time there’s new data from real life (don’t forget to remove old ones as they no longer apply!).

4. Outputs & Sensitivity Analysis Section

Your financial model should also help you identify mistakes, biases, and oversights. Have you forgotten the cost? Are you trying to change too many things at once? Are you unrealistic expectations for your team’s ability to execute specific projects? 

Once your model is completed, test it with these kinds of questions in mind. Start with one assumption at a time – think about each decision methodically before moving on. The more likely an outcome seems, or one that makes sense given your previous analysis, try testing against unlikely situations (i.e., an unlikely but possible growth rate). Even without clear answers, asking tough questions could reveal potential mistakes or blind spots in your thinking—and ultimately improve your plan and your business.

At Numberly, we are committed to helping founders with their financial model and business management. Our team includes financial and business experts who have hands-on experience and international exposure. To get their advice, please schedule your free consultancy call and a customized financial model and guide.