There are different reasons why to engage in financial modeling as a startup. You might need a financial model to build an economically viable business, to be better prepared for the future, to communicate your company’s performance to potential shareholders or new investors, or to set targets for your company you can work towards.
The two main approaches towards financial modeling are the top down method (leveraging market size data to build a forecast for your company) and the bottom up approach (using internal company specific data such as sales data or data on the internal capacity).
It could be useful to combine both methods as it allows you to substantiate short term targets on a detailed level and it allows you to demonstrate the long term desired market share and the ambition an investor is looking for. No matter what approach is used, a forecast stands or falls based on its underlying assumptions.
Typically, the outputs of a startup’s financial model consist of a three to five (sometimes 10) year forecast of the financial statements on a yearly basis (profit and loss statement, balance sheet, cash flow statement), an operational cash flow overview for the coming 12 months ahead, and an overview of the company or sector specific key performance indicators (KPIs).
These outputs are the results of the calculations taking place in the background of a financial model, based on the data entered into different input pages of the financial model. These input pages consist of, for instance, forecasts of: revenues, cost of goods sold, operating expenses, personnel, investments in assets (capital expenditures) and financing.
For some of the outputs supporting calculations and schemes are required. These include, for example, working capital, depreciation and taxes. Using the data that is typically part of a financial model you are also able of creating a valuation of your startup using the discounted cash flow method.
It can be worthwhile to create several scenarios of a financial model (worst vs. base vs. best case) and to check for common pitfalls in financial modeling for startups. Creating multiple scenarios and performing sanity checks helps you get closer to a realistic case, instead of presenting an overly optimistic or an unattractive case.
Having a financial model can help in the fundraising process, as external financers typically require you to provide a forecast. This makes sense, considering the fact you are asking them to put their money in your company.
There are different sources of funding, the main ones being debt and equity financing. However, more and more sources of funding emerge, such as: convertible notes, crowdfunding, initial coin offerings and, of course, subsidies and grants.
If you have made it all the way to the end of this article: well done! With the information we have shared you are well equipped to start forecasting, maybe even build your own financial model and make sense out of the metrics and data that are presented by your model.
As mentioned earlier there are tons of financial model templates for startups to be found on the web. If you need more support, feel free to reach out to us here!