Startup Financial Modelling and How to Build One

Without a financial model, your startup will be a business without a functioning spine. It might still have all the vital organs, but moving forward will be difficult which will slowly lead to the brand’s extinction. That is how vital financial modelling is for startups. With that established, however, you cannot just have a spreadsheet with a few equations. No prediction is always better than wrong predictions and your startup’s financial models cannot return erroneous results. If you are building one, it should be both efficient and effective that requires expert startup financial model training.

How to build a financial model?

It goes without saying that you will need a data organization tool like MS Excel to build your financial model. From there on, you can typically follow one of these avenues to create a working model for your startup.

• Top-down financial model

Here, you know your macro scenario and gradually step down to come to micro solutions that you must implement to reach that bigger picture. The TAM SAM SOM model is used frequently to design via this approach. For instance, say you want to raise $6 million for your startup in the next 6 months. This is your macro goal and you start building your model at the “top”. Then, you step “down” from the total market to the available market and finally to the obtainable market.

• Bottom-up financial model

As evident, this functions in the reverse order of the top-down approach. You make a few assumptions to build your model and contemplate in which direction you might be moving to forecast your business’s position, say, 6-10 years down the lane. Can a certain partnership help your business to grow? Will your predicted advertisement fund return the desired sales figures? These decisions are made using a bottom-up startup financial model that helps to allocate investments and forge partnerships.

Why is a model necessary?

Investors and stakeholders want to see data-backed results. VC firms will give you your $6 million only if you can show them that your present investment strategy will drive greater sales revenue. They need to see the growth path. Then, with the $6 million in hand, you must be able to allocate funds in the right channels so that predicted results meet reality. In short, you will constantly have to switch between the two approaches depending on your current and future goals. Plus, you will want regular feedback on your business’s progress. If your current revenue figures match your model’s predicted value, you can say for sure that you are indeed on track.

Learn how to build a financial model from expert trainers. Teachers with a decade of industry experience are ready to teach online. Become accustomed to modern tools and more approaches. A proper model can steer your startup to fast and structured success while a poor one can drive you to bankruptcy. Invest in learning how to reap the fruits later. It's never late to learn.