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Succeed with a financial model

Validate your business model and make informed decisions for your enterprise to maximise profit and create a sustainable business

get started

Validation

Use your financial model to quantify your business model by putting numbers to the key components that drive your business

Financing

Use your financial model to calculate the amount and type of funding required and to provide essential information for prospective investors

Cash flow

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

Scenarios

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" .

When you start a business it would really help if you could predict the future

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.

What is Financial Modelling?

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.

What is a Financial Model?

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:

  • input assumptions - revenues, COGS, OPEX, staff costs, CAPEX, financing
  • calculations - built into the financial model these link the assumptions to the outputs
  • outputs - a typical three-statement model comprises an income statement (profit and loss), balance sheet and a cash flow statement
  • key performance indicators (KPIs) in the form of charts and graphs
  • a discounted cash flow is also a useful output (used to value a startup)

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.

Creating a Financial Model

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.

4 uses of a Financial Model

Validation

Use your financial model to validate your business model and show how you can operate a profitable and sustainable business.

Financing

Use your financial model to raise debt, equity or crowdfunding for your startup by calculating how much funding you need and when. A financial model is very useful for ensuring you have thought through financial questions that investors will ask. You can also create a valuation of your startup with your financial model.

Cashflow

Many startups fail because they run out of cash. An operational cash flow for the next 12 months is crucial for the day-to-day financial management of your startup because it predicts when and how much cash you will need. Using your financial model for scenario modelling will help you understand the impact of business decisions on your cash flow.

Scenarios

Use your financial model to understand the impact of different scenarios on your financial projections such as:

  • What if you launch 3 months later?
  • What if your sales only reach 50% of your projections?
  • What if you don't manage to hire all the staff you need?

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Would you like to find out more about a bespoke Financial Model for your startup. Fill in the details below and we’ll be in touch.

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Frequently asked questions

Should I build a bespoke financial model or use a template?
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Whilst using a template to model the effect of your business assumptions is quick to set up, in practice we find every business is so different that a bespoke financial model is really needed to fully understand the impact of adjusting the assumptions.
If you are looking for a template solution, there are many out there which you can use, and often these can be a good starting point.

Should I use a Top Down or Bottom Up Approach?
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A key driver for your Financial Model is your sales target. This can be estimated using top down forecasting, bottom up forecasting or a mixture of both.
Top down forecasting looks at the total size of your market (Total Available Market) and makes assumptions about the share of that market that you could service (Serviceable Available Market), and the likely volume that you could realistically capture (Servicable Obtainable Market). This is equal to your sales target.
Bottom up forecasting uses information specific to your startup such as manufacturing constraints, likely sales volumes by marketing channel etc to determine your likely sales target.
Top down forecasting is usually more optimistic than bottom up forecasting. At Cow-Shed we like to combine both approaches and use the bottom up forecast for years 1-2 of a 5 year forecast and the top down method for years 3-5.

How accurate will your Financial Model be?
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Your financial model is based on assumptions so there will be a margin of error, but keeping it up to date will help it to be as accurate as possible. Things to remember :
Keep your financial model in sync with your business model
- Reflect changes to revenue projection and sales targets in the model
- Break down the costs as far as possible and provide details as to where the figures come from
- Be realistic about your resourcing plan
- Include gross, EBITDA and net margins.

Have more questions?

Just reach out, we’re always around to answer any questions.