6 tips for creating a financial model for your startup
This article is part of a series of blogs offering our tops tips on surviving the process of raising impact investment. Investment raising is difficult and time consuming, and the process can seem daunting if it's your first time. We have written this series of blogs as a way to share some insight in to what impact investors are looking for.
Creating your first financial model should not be rocket science.
You can easily work out that if you are selling hot dogs that cost you £3 each, you need to sell them for at least £3.01 to make a profit. In the same way, your financial model should be a reflection of your money in and out -which we sometimes call your business model - at different points in time.
1. Make it logical.
Avoid the complications of accounting and just think about it in a rational way. Going back to the hot dog business, if I assume that I can sell 200 hot dogs a day by standing and shouting outside Camden Town station, my business model is as simple as the cost involved in being able to sell 200 hot dogs a day and the money that I am making out of them as a product of my effort and expenses.
2. Keep it clean and simple.
Make sure you give enough detail of the main levers/drivers of your business, like revenue (price x volume) and costs (cost x volume, salaries, marketing, etc.). Don’t waste your time detailing things that are hard to predict and would probably not affect your profits much.
3. Allow flexibility and NEVER EVER mix inputs with formulas
Make sure you have a separate tab or another colour on the cells that have numbers that you are assuming as inputs. You want to make sure you can change these assumptions. Don’t simply assume that you will grow from selling 200 hot dogs a day to selling 5000 in 1 month without some data. Make it easy to change and adapt it as you start getting more real-life data.
4. Make sure your model is connected
Make a model that reflects how things might change if you alter certain variables. For example, if I hire more people who have a similar ability to sell 200 hot dogs a day, I want to make sure I can input this into the model and automatically see how, instead of selling 200 hot dogs, my business is now selling 400. This might sound obvious, but it is amazing how many people forget to link their models correctly to reflect the most important possible changes.
5. Don’t forget the bigger picture
Go back to your logical analysis and, every time you look at each result, ask what it is telling you. You want to avoid just staying at the detail level and start looking for the strategic implications of your numbers. If you are forecasting that you will grow to sell more than 100,000 hot dogs a day, take a reality check – are more than 100,000 people even coming out of the Tube Station in a day? Maybe, but will all of them buy a hotdog? Definitely not!
6. Perform some scenario tables or “sensitivities”
As we all know, especially in early stage ventures, things hardly ever go to plan as a lot of your assumptions are unproven. Perform some scenarios to evaluate the impact of changing your main business drivers. If you can see what the cash impact is of selling less hot dogs - having already purchased the buns that will probably go to waste, for example – you’ll probably rethink your forecast and make sure they are realistic.
So, keep it simple, flexible and logical!
By Mireya Alvarez