Your startup is probably focused on your customers, products, services, vision, proof points, fundraising…. the list goes on, right? Some of those things are more attractive than others, and sometimes, maybe, way down the list comes finance!

Your exciting goals and aspirations that you love working on will be underpinned by financial data, analysis, and insights that will be as essential to your success as any other factor.

Very few, if any, businesses will succeed without an understanding of their financial position, history, and future. Companies need to be supported with financial tools that are contextual, relevant, and, most of all, simple for the founder to use and interpret.

Most founders do not have a degree in finance, yet finance people do seem to have a habit of making the subject complicated to navigate – it doesn’t need to be that way. It is understandable that many founders roll their eyes at financial modeling because of this unnecessary complexity, so appreciating the benefits of financial modeling alongside a founder-friendly solution is a great way forward.

Here are a few suggestions to tempt you to embrace a financial model for your business!

Your go-to reference source

Quantifying your business is vital. Everything from your marketing strategy to acquire customers to the costs you incur will impact your business shape and size, feel a way of operating, right down to determining the kind of people you want to hire.  

Your reference source isn’t necessarily absolute truth; it should prompt questions, surface curiosity, instill creativity, and signpost warnings or suggestions that we’d do well to listen to.

Nor is it static; there are always changes to be made as we tweak our thinking, evolve what we know, make firm decisions based on proof points, and sometimes realize that our most well-meaning ideas weren’t that practical.  

A good financial model will benefit you beyond “a spreadsheet.” Having and using a good financial model, you should better understand your business, its potential, risks, and needs.

Goal orientation

All startups are or should be goal-oriented. And we know that early on, our goal target-setting may not be that accurate, but we have to start somewhere! 

That’s where your financial model can be a huge help – both in setting goals, financial and nonfinancial too, and then continually, periodically assessing yourself against them, understanding what’s changed, what’s going well, what’s not, what’s the relationship between them, what needs adjusting, what’s the implication of that adjustment and so on.

In short, your financial model should never gather dust. You should be using it to update forecasts with actual data, understand what forecasts you made that were right and those that, well, you know … we’ve all done it! But don’t sweat on it; it’s a model and not supposed to be 100% accurate – it’s there to guide you.

Cash is King 

You can be very profitable, have a considerable growth rate, delighted customers, and a fantastic product. You can fail very quickly if you run out of money, as so many startups have sadly experienced.

Your “Runway” is arguably the most critical metric in your startup’s early days and a vital metric in your financial model. Understanding what levers affect your runway and keeping your head above the water is critical. 

When you start generating revenue, and suddenly the cost of sales seems to leap, payments may be delayed, cash out of business may be brought forward. It can all relatively quietly contribute to your runway getting terminally short. 

Knowing that this either is happening or could happen gives you the headroom to plan, take on debt, bring forward a raise, or cut costs. If you know it’s coming and when you’ll be far more likely to be able to manage it.

Managing your fundraising

Knowing when to fundraise and how much is no guessing game will be a full-time job for someone on the founding team. Your financial model should guide you with what you should raise and when you should raise it based on your projections, which are becoming ever more useful with regular updating.  

Fundraising is a topic we cover elsewhere, and for this blog, there are a few key things to mention. Without wishing to state the obvious, don’t procrastinate and run out of cash; believe the data. Don’t over raise, as too much money can cause a loss of focus and progress and dilute your equity.

Your financial model should be completely investor-friendly (as well as founder-friendly). They’ll likely want to see it, and showing them something you value, use, and understand will be a welcome bonus point in their eyes.

Raising capital is all about being strategic.

To hire or not?

People are both highly valuable contributors to your startup’s success and invariably expensive. 

It is vital to make the right decision on what to hire and what terms to hire. Maintain strict discipline within the business, particularly on the financial side. Monitor your fixed costs very closely, and manage your variable costs by looking at the sales and business model. 

For example, you may need one tech support agent for every 15 customers, so when you hit 16 customers, the model should highlight a new recruitment request.

Your marketing budget, acquisition cycle, revenue per customer, and sales are all interlinked for sales. Balancing your marketing budget, repeat customers, and sales teams leads to balance. It’ll ensure that you’re hiring the right people at the right time and for the right reason.

A great communication tool 

As noted above, your financial model is not just for you. Make sure it is investor-friendly as well. 

You need to be able to share the contents of the model, maybe summarized or with a particular focus, to your team or your whole organization. It should be a reference source for targets, sales plans, bonuses, commissions, and OKRs. Make sure they are so simple that even those with zero accounting knowledge understand.

That said, accountants in the shape of investors and banks will undoubtedly want to see your plan, so it needs to be friendly for them, too. Make sure you give them what they are looking for clearly and concisely.

At Numberly, we promise you’ll get a model that does everything in this blog and more. We pride ourselves on simplicity, founder friendliness, and supporting you on your journey. If you think we may be able to help you, please reach out to us and schedule your free consultancy session today.