Use your financial model to validate your business model and show how you can operate an economical sustainable business.
Use your financial model to calculate how much funding you need and to answer the tricky questions Investors will ask
34% of startups fail because they run out of cash. A Financial Model will predict when and how much cash you will need
Model the impact of different scenarios such as "what if I launch 3 months later" or "what happens if I double my prices" .
Financial Modelling takes your financial forecast and simulates different scenarios to show 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 will perform in the future - for example future revenues, expenses and cashflow - based on historical data and future assumptions.
A financial model is usually a computer program or series of excel spreadsheets which allow you to enter assumptions about your startup and see the impact they will have on your financial projections.
A financial model consists of 3 sections - input assumptions, calculations and outputs:
When you change the assumptions, the financial model will run the calculations and show you the impact on the outputs.
Your financial model will quantify your business model. Your business model will have a high level overview of your revenue and cost streams and your KPIs. Your financial model will build on these.
Although every financial model has 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 look for 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 are usually made using Top Down or Bottom Up forecasting methods. Assumptions can be based on market research, competitor benchmarking, web search volumes etc.
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