Use your financial model to quantify your business model by putting numbers to the key components that drive your business
Use your financial model to calculate the amount and type of funding required and to provide essential information for prospective investors
A third of startups fail because they run out of cash. A financial model will predict how much cash your business requires and when it's needed
Model the impact of different scenarios such as "what if I launch 3 months later" or "what happens to my profit if I double my prices" .
Imagine if you knew that if you increased your prices by 10% your business would make 20% more annual profit.
Or if you took on 3 more team members your annual revenue would increase by 30% and you would need £20k of funding to make payroll in the months your VAT is due.
While you can’t predict the future, you can use a financial model to create realistic projections showing you what could happen based on different scenarios.
A financial model takes your business data - revenue, cost of sales, team costs and so on and creates a series of financial statements - income statement (or profit and loss) , balance sheet (assets and liabilities) and cash flow - which enable you to see what your future financial position will look like.
And the clever bit is it’s dynamic - so you can change those assumptions and see the effect ripple through your financial projections, allowing you to see the effect of each business decision.
So, for example, by changing the number of people you employ you can see the effect on your staff costs and your cash flow and the impact on your revenue and on your profit. You can see if you will be able to reduce your funding requirements - or maybe even avoid having to take on a loan for a few months.
A financial model takes the guess work out of running a business and lets you focus on what you do best.
Financial Modelling builds on your financial forecast using different scenarios to illustrate how your business would perform in the future if specific decisions are taken or different internal and external events occur.
Financial forecasting is different to Financial Modelling.
Financial forecasting estimates how a business is expected to perform in the future - for example future revenues, expenses and cash flow - based on historical data and future assumptions.
A financial model is usually series of Excel spreadsheets or a computer programme that allows you to enter assumptions about your startup and see the impact they will have on your financial projections.
A financial model usually consists of three main elements - input assumptions, calculations and outputs:
When a user changes the input assumptions, the financial model will run the calculations and create a revised set of outputs reflecting the impact of the revised inputs.
A financial model will quantify your business model. Your business model will usually provide a high-level overview of your revenue and cost streams and your KPIs. Your financial model will build on these.
Although all financial models have the same structure (assumptions, calculations and outputs), each one has its own characteristics. Just as every startup in every sector is different, different models will prioritise different assumptions and focus on different metrics. The way you build your revenue forecast will depend on your business model.
The challenge in creating a good financial model is substantiating the numbers you input into the model. For a startup you won't have historical data, so you need to make assumptions about the numbers your model is based on. For example, revenue forecasts can be based on top-down or bottom-up forecasting methods. Assumptions can be based on market research, competitor benchmarking, web search volumes and so on.
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