Importance of Startup Financial Model

Financial modeling is an abstract mathematical representation that financial analysts use to make forecasts for future earnings and performance of a business. While developing a financial model, analysts consider complex business scenarios.   

Financial modeling is a key skill for today's businesses. An extensive online financial modeling course can make you understand the whole concept with easy-to-understand steps.

A startup financial model is an important tool. It helps to raise funds from potential investors, build a financially sustainable business, and avoid bankruptcy. It serves various purposes as below: 

• Proves that the company has a potent business model;
• Provides a unified objective and direction;
• Identifies a company's strengths and weaknesses;
• Helps investors understand the company's earning potential.

A robust startup financial model template is simple, color-coded, easy to modify with separate Excel tab for all the assumptions, and labeled properly using legends. The following steps will help to build one:

• Forecasting Revenue
• Forecasting Expenses
• Forecasting Cash Balance
• Forecasting Investment Capital
• Calculating Net Income.

The main approaches to developing a financial model for a startup are:

Top-down forecasting is a macro perspective working towards a micro view. It helps represent a forecast on the market share business is likely to capture within a particular timeframe.

This approach helps in defining sales targets using the total available market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM) model. 

Next, estimate all costs needed to build or deliver your products and services, sales and marketing expenses, research and development, and other tasks to stay afloat.

While estimating these, you must aim to look for profitability within a particular timeframe.

Bottom-Up forecasting is a micro perspective working towards a macro view. It does not depend much on external factors like the market. It considers internal data such as sales data and the internal capacity of the company. 

This approach enables you to forecast or estimate costs, revenues, expenses, and investments based on the company's data available.

The bottom-up method has its drawbacks. Investors want startups to have rapid growth and capture significant market share. This method may not be able to convince investors about the company's potential.

Therefore, combining both top-down and bottom-up methods is ideal while developing your company's forecasts. Use the top-down method for a long-term forecast and bottom-up method for a relatively shorter-term forecast.

You need to substantiate your figures with assumptions irrespective of the approach uses to build the financial model. Startups usually do not have historical data. So, validate your figures with assumptions.

Assumptions may include anything that supports your claims:

• Market research
• Conversion rates
• Web search volume
• Reports on price and supplies
• Historical sales volume
• Website traffic
• Bills of materials and products.

Investors look for reasons behind your figures. Logical assumptions can make your job during meetings easier.

Financial modeling is an integral part of business and startup operations. A comprehensive course in financial modeling helps in understanding the key aspects of business and analysis and pave the way for a better career.

You can enroll in a leading online program to learn financial modeling with quality video modules and excellent mentorship.